iiP-X) 


T 

flow  to  forecast 


Dugmees  and  investment 


(T* 

OB 


itions 


THE  UNIVERSITY 


OF  ILLINOIS 
LIBRARY 


SCONS']  fg$ 


1  1 

Return  this  book  on  or  before  the 
Latest  Date  stamped  below.  A 
charge  is  made  on  all  overdue 
books. 

University  of  Illinois  Library 

0  r  C  --2  fq 

43 

JuN  “2  I3E 

3 

J  f!  it 

371 

DEC  23 

1993 

OCTO 

1  1993 

M3  2 

f 

/^yuc 


1 


By  P  rank  Crowell 


TICKER  PUBLISHING  COMPANY 

2  Rector  Street 
NEW  YORK  CITY 


Copyright,  1911, 

By  Ticker  Publishing  Co. 


t  vtik,  'i.'s  t)  w.a_x- 


CONTENTS 


in 

Ajf 

lT 


O 

c 

c 


35  a 

egge^' 


Page 

I.  Seme  Fundamental  Conceptions .  7 

II.— Beginning  the  Twenty  Year  Cycle....  i7 
HI* — Labor  Better  Employed  and  Prices 

RisinS .  oR 


IV. — Good  Times . 

1  V. — Public  Demand  for  Stocks . 

VI- — Era  of  Stock  Speculation  to  Securities 
Panic  . 

VII.  After  Securities  Panic  to  Excessive 
Prosperity . 

VIII.— Excessive  Prosperity  to  Waning  of 
Stock  Boom  . 

IX. — Latter  Part  of  Boom  Period . 


39 

45 

55 

64 

73 

87 


X. — Stock  Boom  Ends  First— Business  Now 
Affected  . 

XI. — Business  Declining  . 

XII. — In  the  Shadow  of  the  Panic . 

XIII.  — The  Commercial  Panic . 

XIV.  — Depression  Following  Commercial  Panic 


99 

119 

139 

155 

168 


try  try  ry 


Introduction 


The  claim  of  this  book  to  the  attention  of  the 
business  man  and  the  investor  lies  chiefly  in  the 
broad  experience  and  careful  observation  of  the 
author  during  an  active  and  successful  business  career 
covering  nearly  forty  years. 

While  he  has  not  neglected  the  theoretical  studies 
of  economists,  he  has  in  the  main  relied  upon  his 
own  knowledge,  reasoning  and  observation;  and  he 
now  makes  the  results  public  for  the  benefit  of 
others. 

In  editing  the  book,  I  have  been  continually  sur¬ 
prised  at  the  clearness  and  simplicity  with  which  he 
traces  the  history  of  the  typical  trade  cycle  from 
year  to  year  and  I  do  not  see  how  his  work  can  fail 
to  be  of  the  greatest  interest  and  value  to  investors 
and  business  men.  It  is,  in  fact,  a  real  “key  to  finan¬ 
cial  success, ”  for  those  who  will  read  it  carefully 
and  use  it. 

It  may  be  well  to  mention  here  that  the  author  is 
far  from  claiming  any  ironclad  law  of  periodicity  in 
the  twenty  year  cycle.  It  should  be  obvious  that 
the  period  may  be  somewhat  lengthened  or  short¬ 
ened  by  current  events,  but  the  general  operation 
of  the  cyclical  law  remains  substantially  uniform. 

G.  C.  SELDEN. 


4 


/ 


Preface 


I  have  endeavored  to  make  this  work  as  easy  as 
possible  to  comprehend,  omitting  all  abstruse  reas¬ 
oning  and  technical  terms. 

I  started  collecting  my  notes  with  no  idea  of 
publishing  them,  and  changed  my  mind  toward  the 
last,  so  that  there  may  be  several  quotations  incor¬ 
porated  in  the  work  that  I  would  have  been  pleased 
to  give  the  author  credit  for,  but  it  is  too  late  to 
attempt  to  identify  them.  Occasionally,  I  repeat  ad¬ 
visedly,  where  I  wish  to  bring  out  a  fundamental 
principle  and  impress  it  on  the  reader. 

I  wish  to  acknowledge  my  indebtedness  to  the 
following  writers  on  economics:  C.  D.  Wright, 
author  “Alphabet  of  Finance”;  Carroll,  “Principles 
of  Finance”;  G.  F.  Johnson,  S.  Leavitt,  William  Gib¬ 
son,  William  Burton,  W.  B.  Jones  on  “Economic 
Crises”;  Conant,  Jevons,  Mills,  Juglar,  Prof.  Nor¬ 
ton,  and  especially  to  Theodore  Burton. 

My  dates  at  the  head  of  chapters  are  necessarily 
approximate,  but  will  be  found  to  be  very  close,  so 
far  as  the  past  is  concerned.  The  reader  can  easily 
allow  for  any  small  discrepancy  in  point  of  time. 
Most  of  my  references  to  “commercial  panics”  re¬ 
fer  to  1873  or  1893. 

FRANK  CROWELL. 

New  York  City, 

July  1,  1910. 


5 


I 


I. — Some  Fundamental  Conceptions 

AT  first  might  was  right;  later  barter  was 
evolved. — In  the  very  early  stages  of  man’s 
existence  as  the  cave  dweller  he  undoubt¬ 
edly  took  what  he  desired  by  right  of 
might  or  by  stealth.  Later  on  began  tribal  rela¬ 
tions  and  barter  sprang  up  among  the  members  of 
the  tribe  only;  a  simple  transfer  at  first  of  one 
article  for  another.  In  order  to  barter,  however, 
they  had  first  to  agree  on  values;  and  labor  was 
finally  recognized  as  the  chief  basis  of  value. 

Division  of  labor. — Later,  as  the  tribe  increased 
in  numbers,  a  division  of  labor  took  place  and  those 
who  were  not  equal  to  fighting  manufactured  for 
the  tribe;  thus  the  factory  began  in  the  home.  As 
the  workers  became  more  expert  and  manufactured 
more  than  was  needed,  there  sprang  up  a  pressing 
need  of  some  medium  of  exchange  whereby  unequal 
things  could  be  bartered,  and  also  to  enable  the 
manufacturer  to  store  up  the  results  of  his  surplus 
labor  in  the  form  of  some  object  of  general  desire, 
that  he  could  convert  later  on  into  whatever  he 
then  wanted. 

Gold  the  chosen  medium  of  exchange.— As  long 
as  barter  was  confined  to  the  tribe,  some  convenient 
object  of  general  desire  having  an  inherent  value 


8 


HOW  TO  FORECAST 


recognized  by  all,  was  utilized;  but  as  this  inter¬ 
course  extended  to  other  tribes  it  became  necessary 
to  have  some  common  medium  of  exchange.  Metals 
were  found  to  have  an  intrinsic  value,  were  easily 
portable,  indestructible  and  divisible.  Finally  gold 
was  adopted  as  the  best  medium  of  exchange.  Its 
value  was  at  first  established  entirely  by  demand 
and  supply.  Later  on  the  king  or  government  as¬ 
sumed  the  sole  right  to  coin  money.  Money,  there¬ 
fore,  is  the  accepted  tool  of  exchange — a  merchan¬ 
dise  with  a  special  character.* 

Paper  money  introduced.— As  business  increased 
the  amount  of  gold  coined  was  insufficient  for  the 
requirements  of  exchange.  Gold  was  also  too  bulky 
for  large  transactions;  and  credit  money,  in  the 
shape  of  paper,  was  issued  by  the  Government. 

Credit. — When  the  world  had  become  desirous  of 
extending  business  operations,  and  sufficiently  civil¬ 
ized  to  regard  the  sanctity  of  a  promise  and  to  en¬ 
force  it  by  law,  credit  was  introduced  into  business 
transactions.  The  owner  parted  with  the  goods  and 
accepted  the  purchaser’s  promise  to  pay  in  lieu 
thereof.  Also  notes,  bills  of  exchange  and  checks 
were  introduced,  expressive  of  the  growing  confi¬ 
dence  in  business  circles,  and  because  even  money 
became  too  cumbersome  as  business  transactions 
increased. 

Laborer  paid  in  kind. — Before  money  was  orig¬ 
inated  the  laborer  was  paid  in  kind,  and  this  kept 
him  a  vassal  to  his  feudal  lord,  but  the  use  of 
money  allowed  the  laborer  to  wander  from  place 
to  place  and  finally  made  a  free  man  of  him.  Grad¬ 
ually  this  enabled  the  lord  to  dispose  of  the  products 

*  Compare  Carroll’s  Principles  of  Finance;  also  Alphabet  of 
Finance. 


BUSINESS  CONDITIONS 


9 


of  his  soil  to  other  than  his  followers,  opening  lip 
for  the  first  time  a  market  for  his  surplus. 

Broker  first;  later  became  banker.— As  money 
began  to  circulate  widely  the  different  kinds  be¬ 
came  difficult  to  equalize  and  the  money  broker  was 
evolved — one  whose  business  it  v/as  to  act  as  a  go- 
between.  Exchanging  monies  was  his  principal  busi¬ 
ness;  but  later,  as  the  supply  of  money  increased 
and  it  came  into  general  use,  he  naturally  became 
the  depository  of  this  money,  then  loaned  it,  and  so 
evolved  into  a  banker.  But  in  America  it  was  as 
late  as  the  dawn  of  the  nineteenth  century  before 
the  people  felt  reasonably  safe  in  placing  their  sav¬ 
ings  out  of  their  own  control  in  the  hands  of 
bankers. 

Man’s  utilization  of  power  affected  business 
greatly.— As  long  as  man’s  motive  power  consisted 
only  of  manual  labor  supplemented  by  animals,  and 
later  by  the  windmill,  his  producing  capacity  was 
very  small  and  his  business  transactions  of  a  prim¬ 
itive  order.  This  continued  as  late  as  one  hundred 
years  ago,  when  steam  was  discovered,  furnishing 
cheap  power.  Steam,  however,  was  not  generally 
utilized  until  between  1850  and  1865.  It  made  pos¬ 
sible,  from  that  time  forward,  our  steamboats,  rail¬ 
roads  and  great  manufacturing  capacity;  to  be  sup¬ 
plemented  later  on  by  the  discovery  of  electricity. 
These  factors,  increasing  the  volume  of  business  so 
enormously,  both  made  necessary  and  formed  the 
foundation  of  modern  business  methods,  the  keynote 
of  which  is  systematic  distribution.  1 

Old  panics  caused  by  drouth  and  famine.~/lt  was 
famine  conditions,  superinduced  by  war,  drouth,  or 
floods,  that  created  panics  in  olden  times,  but  by 
the  aid  of  the  railroad,  the  steamboat  and  modern 


10 


HOW  TO  FORECAST 


business  methods,  famines  have  been  practically 
abolished  among  civilized  nation!^ 

Former  panics  destroyed  values. — The  old  time 
panic  resulted  from  actual  destruction  of  goods, 
whereas  our  modern  panics  create  a  derangement 
of  the  country’s  industries  for  the  time  being,  with 
but  a  small  percentage  of  actual  destruction. 

Modern  panics  of  recent  origip^Our  best  writers 
agree  that  modern  panics  are  of  very  recent  origin 
and  have  their  chief  basis  in  our  credit  system, 
which  at  times  is  inadequate  to  meet  the  require¬ 
ments  of  our  vast  and  increasing  production.  This 
is  the  very  reverse  of  the  failing  supplies  of  former 
times.*  \ 

Birth  of  corporations. — The  birth  of  modern  cor¬ 
porations  was  in  response  to  an  increasing  supply 
of  wealth  among  the  masses,  demanding  an  invest¬ 
ment  outlet.  By  means  of  corporations  the  people 
were  able  to  become  interested  in  great  business 
undertakings. 

Effect  of  corporations. — The  corporation,  with  its 
aggregation  of  capital,  and  with  a  wide  market  for 
its  shares,  gave  to  many  properties  and  enterprises 
a  mobility  and  divisibility  which  greatly  facilitated 
their  management.  To  this  great  step  forward  in 
business  organization  we  owe  our  modern  banks,  life 
insurance  and  trust  companies,  canals,  railroads,  etc. 

Prof.  Newrath  in  Economic  Review ,  v.  17,  p.  28.  Jones, 
Economic  Crises,  pp.  1-5,  says:  “The  crisis  is  practically  of  nine¬ 
teenth  century  origin. ’’X.Also  see  First  Annual  Report  of  the 
Commissioner  of  Labor  on  Industrial  Depression,  p.  15:  “In¬ 
deed  the  economic  crisis  in  its  modern  form  is  essentially  a  phe¬ 
nomenon  of  the  organization  of  industry  and  credit.”  See  also 
Burton,  Crises  and  Depressions./^ Jones,  Economic  Crises,  says: 
“The  conditions  under  which  crises  occurred  formerly  are  so 
different  from  those  prevailing  since,  that  it  may  be  safely  said 
that  littlev  of  value  can  be  found  in  discussions  published  prior 
to  1837.”  >See  Bolles,  Financial  History  of  the  U.  S.,  p.  1,  1774- 
1787.  ^ 


BUSINESS  CONDITIONS 


11 


Practically  all  the  great  undertakings  of  the  last 
fifty  years  have  been  accomplished  through  corpora¬ 
tions. 

Periodicity  of  panics. — Science  teaches  that  “an 
original  impulse  of  any  kind  finally  resoves  itself 
into  periodic  or  systemical  motion.”  Working  under 
this  law,  the  periodicity  of  panics  is  so  marked,  es¬ 
pecially  in  the  older  countries,  as  to  be  almost  be¬ 
yond  question.  The  cycles  are  periods  of  approxi¬ 
mately  ten  years,  with  a  variance  that  is  ordinarily 
but  slight,  due  mainly  to  political  events,  as  a  war 
or  a  revolution,  debasing  the  currency,  or  unwise 
legislation.* 

Two  kinds  of  panics. — I  divide  panics  into  two 
main  divisions:  the  securities  or  financial  panic,  in 
which  the  crisis  is  the  main  feature;  and  the  other 
the  general  or  commercial  panic,  in  which  the  de¬ 
pression  that  follows  is  more  severe  in  its  effects 
than  the  crisis  itself.  The  former  is  a  stock  panic 
and  has  sympathetic  effect  on  business.  The  latter 
affects  all  financial,  commercial  and  industrial  lines 
and  is  altogether  a  very  serious  affair.  These  are 

*  See  Webster’s  Essays;  also  Prof.  Nicholson,  Political  Econ¬ 
omy,  v.  2,  pp.  213-214.  Gibson,  Cycles  of  Speculation,  pp.  24-33, 
says,  “That  there  has  been  a  recurrence  of  these  troubles  (crises) 
about  once  in  ten  years,  is  not  a  debatable  question.”  Also 
Prof.  Pareto,  Cours  d’Economie.  Jevons  divides  crises  by  al¬ 
most  exactly  ten  years  periods.  Burton,  Crises,  pp.307-308,  says: 
“Periodicity  is  no  accident,  as  an  examination  of  the  rules  which 
govern  industrial  and  commercial  movements  will  show.”  Also 
consult  Walter  Bagehot’;  and  Jones,  Economic  Crises,  pp.  1-22. 
Frederick  Engels,  Socialism,  pp.  64-65,  says:  “The  world’s  in¬ 
dustrial  and  commercial  production  and  exchange  are  thrown 
out  of  joint  about  once  every  ten  years.”  First  Annual  Report 
of  Commissioner  of  Labor  on  Industrial  Depression,  p.  15,  says: 
“The  features  of  regularity  and  contemporaneousness  of  crises 
and  depressions  have  been  apparent  since  the  commencement  of 
the  century.”  Consult  Conant,  Yale  Review,  v.  9,  p.  386.  Mill 
divides  the  ten  years  between  panics  into  three  periods.  Ed¬ 
mond  Therey  in  N.  Y.  Times,  Jan.  20,  1910, ,  says:  “The  law  of 
periodicity  of  crises  being  clearly  established,”  etc.  See  Selden, 
Trade  Cycles,  in  Quar.  Jour,  of  Economics ,  v.  16. 


12 


HOW  TO  FORECAST 


both  periodical.  It  takes  each  about  twenty  years 
to  culminate  and  readjust  values.  One  occurs  every 
alternate  ten  years,  so  that  the  two  occur  in  each 
twenty  year  cycle  and  can  be  thereafter  fairly  ac¬ 
curately  forecasted  unless  delayed  or  expedited  by 
war  or  some  other  influence  of  vast  economic  im¬ 
portance. 

A  third  but  minor  division  would  include  inci¬ 
dental  crashes  or  flurries  occurring  from  time  to 
time,  which  are  the  result  of  temporary  causes; 
such  as  money  stringency,  political  happenings,  un¬ 
wise  currency  or  other  legislation,  manipulation  in 
Wall  Street,  a  convulsion  of  nature,  such  as  an 
earthquake  or  great  fire,  some  great  failure,  etc. 
Most  of  these  affect  only  the  money  and  credit  mar¬ 
ket,  and  have  temporary  effect  on  the  stock  market, 
more  or  less  severe,  but  they  seldom  seriously  de¬ 
press  the  commerce  or  industries  of  the  country. 
They  are  mostly  of  short  duration  and  usually  cause 
only  a  temporary  displacement  of  values. 

Securities  panic. — The  securities  panic  is  preceded 
by  a  long  period  of  liquidation  in  stocks,  generally 

of  two  or  three  years  duration,  and  is  followed  by 

* 

stagnation  on  the  stock  exchange  for  a  year  or  more 
thereafter,  a  readjustment  of  stock  values  and  a 
reflex  effect  in  business  lines. 

Commercial  panic.— -The  commercial  or  business 
panic  is  preceded  and  followed  by  several  years  of 
liquidation,  causing  great  losses  and  wages  and  price 
reductions  and  affecting  all  values.  The  period  of 
readjustment  covers  several  years. 

Greatest  of  minor  panics.-— The  greatest  of  the 
minor  panics,  so  called,  comes-at  the  termination  of 
the  great  rise  in  stock  and  commodity  prices  during 
a  boom  period.  When  the  strain  of  money  and 


BUSINESS  CONDITIONS 


13 


credit  from  the  pressure  of  the  great  volume  of 
business  done  in  all  lines  is  too  great,  a  crisis  oc¬ 
curs,  and  if  at  this  time  the  element  of  fear  as  to 
the  stability  of  financial  institutions  is  introduced, 
it  may  beget  a  stringency  panic,  such  as  occurred 
in  November,  1907,  and  was  only  narrowly  avoided 
in  1887  and  1867.  Such  a  crisis  is  more  serious  and 
lasting,  because  it  comes  at  a  time  when  the  reac¬ 
tion  from  excessive  prices  and  over-extended  credit 
has  naturally  set  in. 

Universality  of  panics. — -As  our  relations  with  all 
other  countries  grow  more  intimate,  the  tendency 
is  toward  a  uniformity  of  panic  periods.  The  crisis 
is  merely  a  natural  reaction  from  a  period  of  excess¬ 
ive  extravagance  and  speculation,  which,  if  con¬ 
tinued,  would  only  lead  to  still  worse  results.  After 
recovery  from  every  crisis  the  people  live  on  a 
higher  plane  of  consumption  and  enjoyment. 

Cause  of  fall  in  prices.-— Vanishing  credit,  in  time 
of  panic,  is  the  primary  cause  of  the  fall  of  prices. 
Too  often  we  have  resorted  to  inflation  as  a  means 
of  preventing  panic,  forgetting  that,  fundamentally, 
it  is  not  business  that  adjusts  itself  to  the  volume  of 
money,  but  money  that  adjusts  itself  to  the  volume 
of  business.  Inflation  defeats  its  own  purpose  by 
furnishing  the  speculator  with  more  funds  to  boom 
prices  with  at  the  very  time  when  the  slowing  down 
of  business  and  the  decline  of  prices  is  the  natural 
and  necesssary  remedy. 

Effect  of  increased  gold  output.— -The  wonderful 
gold  output  of  late  years,  the  supply  increasing 
much  faster  in  proportion  than  the  increase  in  popu¬ 
lation,  has  stimulated  commerce  and  industry  won¬ 
derfully  and  been  greatly  instrumental  in  raising 
prices.  The  increased  gold  supply  has  been  brought 


14 


HOW  TO  FORECAST 


about  by  improved  methods  of  mining,  new  invent 
tions,  and  economies  in  production.  Prof.  Norton 
states  that  from  Jan.  i,  1896,  to  Nov.  1,  1906,  our 
gold  output  increased  80.7  per  cent,  and  our  com¬ 
modity  prices  37.2  per  cent.  Ten  to  fifteen  years 
ago,  he  says,  “it  did  not  pay  to  operate  a  mine 
where  the  average  yield  of  gold  was  less  than  $12 
per  ton;  now  $1.30  per  ton  will  yield  a  paying  re¬ 
turn.”  It  is  cheapened  production,  of  gold  as  of 
other  things,  that  is  most  influential  in  placing  man 
on  a  higher  plane  of  living  and  in  making  the  bare 
necessities  of  life  more  easily  obtainable. 

Effect  of  modern  financial  methods. — Modern 
financial  methods,  as  exemplified  in  banking  in  par¬ 
ticular,  increase  greatly  the  circulation  of  money, 
making  one  dollar  do  the  work  that  several  form¬ 
erly  did,  and  being  practically  equivalent  to  a  great 
increase  in  money.  Especially  is  this  so  in  the 
cities,  where  money  will  do  many  times  the  work 
that  it  would  do  in  the  wilds  of  Africa,  for  instance. 
Credit  also  has  increased  so  greatly  that  in  the 
United  States  only  about  3  per  cent,  cash  is  used  in 
the  Clearing  House  and  5  per  cent,  in  banking  and 
business  operations;  until  now  credit  is  the  chief 
medium  of  exchange  and  gold  is  mainly  used  for 
reserve  purposes  and  to  adjust  balances. 

Abuse  of  credit. — Evidently  we  must  be  careful 
of  credit  in  our  endeavors  to  increase  the  supply 
of  money,  the  latter  representing  so  small  a  per¬ 
centage;  and  as  this  credit  structure  grows,  one  can 
easily  realize  that  this  small  percentage  of  money 
must  be  the  best  possible,  without  the  shadow  of  a 
doubt  attached  to  it,  or  the  whole  vast  structure 
will  be  involved  in  ruin.  Hence  mere  agitation  of 
the  subject  is  a  serious  matter.  It  finds  instantane- 


BUSINESS  CONDITIONS 


15 


ous  reflection  in  the  financial  world  and,  if  con¬ 
tinued,  in  the  commercial  and  industrial  world  as 
well.  As  credit  vanishes  its  burden  of  work  is 
shifted  to  money,  but  the  task  is  too  great  and 
hoarding  sets  in;  prices  fall  and  general  liquidation 
is  in  order. 

The  bulk  of  bank  and  trust  company  deposits  are 
not  cash  but  credits — mere  bookkeeping  entries 
backed  up  by  the  depositors’  checks,  notes,  or  se¬ 
curities.  National  banks  in  central  reserve  cities  can 
issue  credits  equal  to  four  times  the  amount  of  their 
money  reserves;  and  banks  in  the  smaller  cities 
and  towns  six  to  twenty  times  the  actual  cash  in 
their  vaults.  In  times  of  great  activity  credit  even 
exceeds  this,  because  withdrawals  of  cash  decrease 
the  reserve  below  the  legal  limits. 

Interest. — The  true  rate  of  interest  is  best  meas¬ 
ured  by  six  months  loans  on  good  collateral  or  by 
gilt-edged  commercial  paper,  rather  than  by  the 
rate  paid  by  stocks.  Fluctuations  in  interest  rates 
are  often  caused  by  changes  in  the  relative  supply 
of  circulating  and  fixed  capital.  Interest  rates  are 
also  affected  by  rising  or  falling  commodity  prices, 
as  such  changes  increase  or  decrease  the  demand 
for  money.  The  degree  of  activity  in  business  and 
on  ’change  are,  of  course,  factors  that  affect  interest 
rates. 

Prices  governed  by  economic  laws.— Prices  of 
securities  and  commodities  are  governed  by  econo¬ 
mic  laws.  The  speculator  is  only  an  incident,  and 
must  work  with  the  law  or  suffer  the  consequences. 
His  activities  (unless  he  improves,  as  by  building) 
cannot  create  values.  All  he  can  do  is  to  hasten 
the  tendency  of  the  times  somewhat,  or  if  working 
against  the  law,  to  assist  in  creating  a  slight  and 


1G 


HOW  TO  FORECAST 


temporary  displacement  of  values.  His  dealings  are 
reflected  in  the  bank  clearings,  where,  however, 
they  cannot  be  identified,  nor  do  they  show  his 
profits  or  losses.  For  this  reason  bank  clearings  do 
not  tell  all  the  story,*  although,  generally  speaking, 
they  do  reflect  the  volume  of  business,  or  of  business 
and  speculation  combined. 


*  Burton,  Crises,  p.  165. 


XT—  Beginning  tlic  Twenty  Year  Cycle 


Improving  Times.  About  Three  Years  after  Com¬ 
mercial  Panic. 

[Note — These  conditions  last  occurred  in  1896.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example,  they  may  he  expected  substantially  to  repeat 
themselves  about  1916.] 

THE  reader  to  forecast  coming  financial  situ- 
ations.-— My  desire  in  the  following  pages 
is  to  trace  financial,  commercial  and  in¬ 
dustrial  development  closely  from  stage 
to  stage  during  the  twenty  year  cycle  (after  which 
period  financial  history  starts  in  to  repeat  itself),  so 
that  the  reader  may  at  any  time  be  able  to  locate 
the  present  status  of  business  affairs,  to  know  in 
great  measure  what  is  before  him,  understand  the 
laws  governing  the  conditions,  prepare  himself  for 
what  is  to  come,  and  thus  make  timely  investments 
or  withdrawals. 

We  will  begin  at  that  period  of  the  depression 
following  a  commercial  panic  when  business  starts 
on  an  ascending  scale,  with  a  dawning  light  of  bet¬ 
ter  things  to  come. 


18 


HOW  TO  FORECAST 


Excesses  carry  germs  of  their  own  destruction. — 

The  extremes  of  good  and  bad  times  have  in  them¬ 
selves  the  elements  of  their  own  destruction,  for 
nature  abominates  an  excess.  Extreme  bad  times 
beget  economies  and  wise  management  that  result 
in  the  accumulation  of  new  wealth.  This  soon 
causes  consumption  to  outstrip  production,  and 
finally  requires  the  employment  of  more  men  and 
the  payment  of  better  wages  in  order  to  produce 
enough  to  satisfy  these  increased  demands. 

Country  with  greatest  resources  recovers  first. — 
Of  two  nations  that  have  been  equally  speculative, 
the  one  that  has  natural  resources  to  fall  back  on 
will  recover  first,  for  these  natural  resources  con¬ 
stitute  a  storehouse  of  wealth  that  can  be  drawn 
upon  in  bad  times;  whereas  labor  is  the  main  asset 
of  the  older  country,  and  even  this  is  more  or  less 
dependent  on  the  natural  products  of  the  younger 
country  to  employ  it. 

Conditions  necessary  before  betterment. — Before 
any  change  can  take  place,  not  only  must  over¬ 
production  have  ceased  but  the  liquidation  must  be 
thorough  and  complete — old  debts  paid  and  few  new 
ones  contracted,  all  lines  of  business  on  as  near  a 
cash  basis  as  practicable,  confidence  restored  in  the 
financial  integrity  and  ability  of  those  we  do  busi¬ 
ness  with,  and  above  all,  a  feeling  of  assurance  that 
prices  will  go  no  lower.  At  this  time  there  will 
also  appear  a  large  excess  of  exports  and  low  inter¬ 
est  rates.  All  these  are  indicative  of  a  finished  liqui¬ 
dation  and  a  subsequent  steady  accretion  of  wealth. 
Mercantile  and  financial  conditions  must  have 
cleared  up  enough  to  allow  one  to  do  business  safely 
even  though  on  a  very  small  profit. 

Farmer  and  miner  feel  change  first. — It  is  to  the 


BUSINESS  CONDITIONS 


19 


farmer  and  miner,  those  original  creators  of  wealth 
from  the  bowels  of  mother  earth,  that  we  must  look 
for  the  first  signs  of  improvement.  By  stern  neces¬ 
sity  driven,  we  now  produce  more  grains  and  other 
farm  products  than  ever  before,  due  to  greater  care 
and  improved  methods  being  adopted  by  many,  and 
also  to  the  fact  that  a  large  number  of  persons  have 
been  driven  to  farming  as  a  last  resort. 

Farmer  pays  up. — The  price  for  farm  products  is 
low,  partaking  of  the  tendency  of  the  times,  and  the 
export  business  consequently  large;  yet  gradually 
the  farmer  pays  his  debts  and  gets  on  a  solid  basis, 
in  condition  to  be  greatly  benefited  by  a  good  crop 
or  two  at  fair  prices,  and  the  accumulation  of 
money,  now  idle  in  the  banks,  forms  the  basis  later 
for  better  prices  for  his  products.  His  crops  now 
generally  yield  well,  for  he  is  working  harder  and 
putting  more  brains  into  his  work  than  ever  before, 
with  consequent  good  results. 

Where  crop  money  goes  first. — The  returns  from 
these  crops  go  first  toward  paying  up  our  European 
indebtedness  and  liquidating  the  mortgage  obliga¬ 
tions  of  the  farmer,  later  into  bank  coffers  tempo¬ 
rarily. 

Miner  producing  gold  steadily. — The  miners, 
meanwhile,  are  busy  producing  new  gold,  to  be 
added  to  the  general  fund  which  is  accumulating 
quietly  and  steadily,  in  every  bank  throughout  the 
land.  Bank  statements  reflect  the  stagnant  condi¬ 
tion  of  trade  by  the  steadily  increasing  percentage 
of  reserves  as  compared  with  loans. 

Liquid  capital  must  be  renewed. — The  destruc¬ 
tion  and  diversion  of  liquid  capital  was  one  of  the 
main  causes  of  the  commercial  panic,  consequently 
this  capital  has  to  be  replaced  and  added  to  before 


20 


HOW  TO  FORECAST 


confidence  can  be  restored.  The  actual  cash  in  large 
amounts  must  be  in  sight,  and  interest  rates  go 
low  enough  to  render  manufacturing  profitable,  even 
at  the  low  prices  then  existing. 

Great  increase  in  money  depreciates  it. — The  pro¬ 
duction  of  gold  has  increased  during  these  hard 
times  much  faster  than  the  population.  This  con¬ 
tinues  until  gold  is  out  of  proportion  to  everything 
else  and  so  depreciates.  The  foundation  is  thus  laid 
for  a  rise  in  bonds,  stocks  and  commodities;  for  the 
only  way  gold,  being  the  measure  of  value,  can 
show  a  depreciation,  is  through  a  rise  in  the  articles 
whose  values  it  measures.  As  the  supplv  of  gold 
increases  its  purchasing  power  grows  less\ 

Some  time  before  increase  raises  prices. — Xt  first 
this  increasing  supply  of  money  is  not  reflected  in 
the  financial  world.  Hume,  Mill  and  others  show 
that  while  the  volume  of  money  might  be  increased 
or  diminished  instantly,  the  resulting  movement  of 
prices  would  occur  only  after  an  interval  when  it 
had  time  to  permeate  all  the  channels  of  trade. 

How  an  expansion  of  money  with  confidence  acts. 
— An  expansion  of  money  such  as  occurs  at  this 
time,  when  confidence  is  restored,  acts  as  follows: 
“It  first  lowers  interest  rates,  then  advances  prices 
generally,  developing  great  activity  ultimately  in 
business  lines,  and  continues  until  all  of  this  new 
supply  of  money  is  in  active  service.  Then  interest 
steadily  rises,  under  the  stimulus  of  this  growing 
demand  from  profits  realized,  and  finally  reaches 
impossible  rates  and  so  brings  about  its  own  fall.” 
At  present,  however,  it  has  only  reached  that  stage 
where  it  has  forced  down  interest  rates  to  low  fig¬ 
ures  (foreshadowing  the  great  reaction  that  is  to 
come,  for  the  greater  the  fall,  the  greater  the  re- 


BUSINESS  CONDITIONS 


21 


bound),  and  it  is  now  quietly  at  work  stimulating 
prices  for  the  rise  soon  to  take  place. 

Growing  impatience  of  owner  of  idle  money.-— An 
early  indication  at  this  time  is  the  growing  impa¬ 
tience  of  the  money  owner  with  the  small  yield  of 
his  capital  in  interest  returns.  This  feeling  is  soon 
followed  by  an  early  stage  of  returning  confidence; 
then  comes  a  desire  to  invest. 

Stocks  and  bonds  attractive  because  easily  con¬ 
vertible — realty  not. — Those  investments  which  are 
the  most  easily  convertible  and  from  which  the 
quickest  results  can  be  obtained,  naturally  have,  if 
deemed  safe,  the  greatest  attraction  for  the  people, 
especially  when,  as  at  this  time,  investors  are  so 
timorous.  Hence  the  attraction  of  the  stock  ex¬ 
change,  with  its  constant  action,  ready  sales  and 
semi-liquid  assets,  as  against  real  estate  with  its 
slow  methods,  which  place  it  at  a  great  disadvant¬ 
age,  and  in  bad  times,  owing  to  its  lack  of  converti¬ 
bility,  make  it  an  unattractive  asset  to  those  who 
want  to  realize  quickly.  It  is  therefore  to  the  finan¬ 
cial  world  that  we  must  look  for  any  improvement. 
All  great  rises  depend  on  the  money  market;  there¬ 
fore,  before  any  such  movement  occurs  there  must 
be  an  unusually  strong  bank  showing  of  available 
funds  on  hand. 

All  wondering  why  advance  does  not  start  in.— At 

this  time  every  onev«4i£*is  tired  out  waiting  for  the 
change  and  all  are  wondering  why,  with  all  the  ma¬ 
terial  wealth  that  is  being  created,  the  times  do  not 
improve;  not  realizing  that  this  wealth  has  gone  into 
debt  paying  and  into  building  up  a  new  supply  of 
liquid  capital,  to  be  utilized  later  in  the  various  busi¬ 
ness  channels  when  confidence  is  restored. 

Masses  timid.— The  masses  have  been  frightened 


22 


HOW  TO  FORECAST 


and  deeply  injured  as  well  in  their  pocketbooks; 
they  are,  therefore,  timid  and  afraid,  especially  as 
they  are  surrrounded  with  an  atmosphere  of  fear 
that  has  its  psychological  effect  on  us  all.  They 
feel  that  they  can  afford  to  take  no  risks.  Their 
very  financial  existence  often  depends  upon  a  wise 
investment  of  their  capital,  so  they  intend,  if  pos¬ 
sible,  to  make  no  mistakes.  Their  investments  must 
be  readily  convertible,  so  that  if  afraid  at  any  time 
they  can  receive  back  their  cash.  They  desire  to 
have  it  in  such  shape  that  they  can  keep  posted  as 
to  its  various  rises  and  falls,  so  that  they  can  be 
ready  to  act  at  a  moment’s  notice;  but,  above  all,  it 
must  be  safe. 

Bonds  are  most  attractive. — The  stock  market  an¬ 
swers  these  requirements.  At  this  period  stock 
values  seem  uncertain,  but  bonds  are  a  prior  lien. 
Especially  attractive  are  United  States,  state  and 
municipal  bonds,  and  bonds  representing  first  liens 
on  large  corporations  that  investors  know  all  about. 

Safe  investments  only. — It  is  investment  securi¬ 
ties  that  the  people  want,  and  of  the  safest  kind. 
Their  opinion  also  is  strengthened  by  knowing  that 
the  banker  who,  they  realize,  is  an  expert  in  this  line 
and  as  a  trustee  should  be  careful,  has  also  been 
quietly  purchasing  bonds.  The  banks  have  found 
good  commercial  paper  very  scarce,  business  being 
quiet  and  money  plenty,  hence  they  have  sought 
other  investments.  So  to  the  bond  market  we  look 
for  the  first  signs  of  betterment,  indicating  a  les¬ 
sened  fear,  and  the  quiet  birth  of  an  investing  move¬ 
ment  which,  as  we  shall  see,  steadily  grows  as  it 
proceeds. 

Poorer  classes  now  buying. — Later,  a  demand  for 
small  denominations  of  government  bonds  indicates 


BUSINESS  CONDITIONS 


23 


that  the  poorer  classes  are  getting-  over  their  fright 
and  are  investing,  taking  their  money  from  hiding 
places  and  from  the  savings  banks  for  that  purpose. 

Bonds  active  when  interest  is  low. — The  rate  of 
interest  yielded  by  bonds  is  low,  therefore  they  are 
most  active  when  interest  rates  in  general  are  low. 
This  occurs  when  the  business  and  speculation  of 
the  country  are  quiet,  dating  from  the  time  busi¬ 
ness  slackens  until  it  starts  up  again,  and  until 
money  is  in  active  demand  at  higher  rates  than 
bonds  will  yield. 

Institutions  buy  bonds.-— Institutions  have  also 
been  buying  bonds,  as  most  other  securities  have 
been  discredited  because  of  the  want  of  confidence 
and  the  small  amount  of  business  transacted. 

Speculator  first  to  buy  stocks. — The  low  rate  of 
interest  proves  very  attractive  to  the  speculator,  as 
at  existing  prices  choice  stocks  will  pay  six  per  cent 
or  perhaps  even  better,  and  in  large  sums  he  can 
borrow  money  of  the  bank  at  one,  one  and  one-half, 
or  two  per  cent.  This  leaves  him  a  handsome  mar¬ 
gin.  He  accordingly  buys,  rather  timidly  at  first, 
but  more  boldly  later,  as  he  finds  his  faith  justified 
and  his  calculations  successful.* 

Money  goes  to  Wall  Street. — Money  must  seek  an 
outlet  for  investment  from  which  it  can  realize  a 
paying  rate  of  interest,  and  if  mercantile  pursuits 
are  dull  it  generally  goes  to  Wall  Street,  to  be 
loaned  out  for  investment  or  speculative  purposes. 
For  a  time  Wall  Street  is  to  have  a  large  part  of  the 
country’s  loanable  funds  at  its  disposal,  and  this  lays 
the  foundation  for  a  boom  in  stocks  later  on. 

Banker  buys  stocks. — The  banker,  who  has  here¬ 
tofore  purchased  bonds,  at  length  finds  that  the 


*  See  Burton’s  Economic  Crises,  p.  232. 


24 


HOW  TO  FORECAST 


increased  demand  for  these  has  so  raised  the  price, 
that  their  yield  is  no  longer  sufficiently  remunera¬ 
tive.  In  the  meantime  his  deposits  are  growing,  and 
often  he  is  paying  interest  on  the  deposits  of  out- 
of-town  banks.  He  must  have  better  returns  if  he 
is  to  show  satisfactory  results  to  his  stockholders, 
who  will  hold  him  accountable.  He  has  watched 
the  Wall  Street  investor — or  speculator,  for  the 
operation  above  described  partakes  of  both  invest¬ 
ment  and  speculation.  Finding  him  successful  and 
the  outlook  now  better,  fear  having  in  the  main  sub¬ 
sided  and  liquidation  having  ceased,  the  banker 
cautiously  and  advisedly  purchases  gilt  edged 
stocks.  These  are  now  a  better  investment  than 
formerly,  as  the  general  buying  of  bonds,  together 
with  the  benefits  derived  from  the  successful  opera¬ 
tions  of  the  farmer  and  miner,  and  the  increased 
export  trade,  are  relieving  the  acute  financial  con¬ 
ditions  of  the  railroads,  and  they  are  paying  up  their 
floating  debts.  This  is  placing  the  railroads  in  a 
position  where  they  will  soon  be  thinking  of  spend¬ 
ing  money  in  improvements  and  betterments  of 
road  and  equipment,  which  they  are  now,  through 
long  enforced  neglect,  sadly  in  need  of. 

Investors  now  buying  gilt  edged  stocks. — As  in¬ 
vestments  in  bonds  increase  and  values  advance, 
the  interest  return  becomes  too  small,  and  investors 
are  driven  into  the  stock  market,  having  confidence 
that  earnings  will  increase  in  the  near  future.  They 
purchase,  however,  only  the  gilt  edge  securities  of 
those  large  corporations  that  have  been  known  long 
and  favorably  by  the  public  as  reliable  dividend 
payers. 

Mining  stocks  bought  by  professionals.-— Mining 
stocks  are  in  more  demand  than  heretofore  among 


BUSINESS  CONDITIONS 


25 


those  whose  business  it  is  to  buy,  sell  and  develop 
mines.  This  is  not  now  a  general  speculative  move¬ 
ment.  The  public  are  not  in  it.  It  is  a  quiet  absorp¬ 
tion  by  those  who  are  posted  on  values  and  are 
content  with  a  reasonable  investment  return.  Mines 
are  thus  developed  and  the  gold  output  increased, 
establishing  a  solid  basis  for  our  finances  and  there¬ 
by  materially  aiding  the  return  of  prosperous  times. 

Farmer  and  miner  have  money,  which  with  sur¬ 
plus  money  in  bank,  now  seeks  investment.— The 
farmer,  as  we  have  seen,  has  paid  his  debts,  and  if 
his  crops,  with  the  greater  care  taken,  are  now 
reasonably  good,  he  has  money  to  make  purchases 
on  a  more  extended  scale.  It  is  this  money  and  the 
new  wealth  from  the  mines,  together  with  the 
money  going  quietly  into  stocks  and  bonds,  that 
now  begins  to  show  important  effects  in  the  com¬ 
mercial  and  industrial  world.  Commerce  deals 
chiefly  in  commodities,  which  are  less  readily  con¬ 
vertible  than  bonds  and  stocks  and  are  therefore 
slower  to  move.  These  markets  also  must  needs 
apply  to  the  financial  world  for  a  portion  of  that 
liquid  capital  which  enters  into  all  business  opera¬ 
tions,  and  which  is  now  timidly  seeking*  investment. 
So  under  normal  conditions  capital  and  enterprise 
seek  each  other,  for  the  mutual  benefit  to  be  derived 
from  the  transaction. 

Purchasing  ability  of  masses.— At  this  time  the 
purchasing  power  of  the  masses  and  their  disposi¬ 
tion  to  buy  are  two  very  important  factors,  to  be 
studied  in  their  bearing  on  the  business  situation. 

Low  prices  for  materials  encourage  the  manufac¬ 
turer. — We  will  now  consider  the  commercial  and 
industrial  sides  of  business  life,  to  note  there,  if 
possible,  signs  of  improvement.  Cheap  prices  for 


26 


HOW  TO  FORECAST 


raw  material  and  labor  and  low  interest  rates  start 
up  manufacturing.  Decreased  cost  of  production 
often  benefits  the  manufacturer  as  much  as  an  in¬ 
crease  in  the  price  of  the  finished  article,  by  bring¬ 
ing  the  product  within  the  purchasing  power  of  a 
larger  number  of  new  buyers  and  making  it  more 
tempting  to  former  buyers,  and  thus  increasing  the 
sales. 

Surplus  stocks  of  goods  disappearing  a  good 
sign. — The  first  favorable  indication,  noted  some 
time  after  the  panic,  is  that  surplus  stocks  on  hand 
are  quietly  dwindling,  due  to  the  diversion  of  any 
excess,  where  possible,  to  foreign  countries,  and  the 
restriction  of  output  to  meet  the  demands  of  the 
times.  Restriction  of  output,  however,  is,  in  nearly 
every  line,  merely  temporary,  and  is  terminated  by 
a  diligent  search  for  foreign  buyers,  or  if  the  prod¬ 
uct  is  not  exportable,  then  finally  by  growth  in  popu¬ 
lation,  the  quiet  gain  in  the  purchasing  power  of  the 
people,  and  the  betterment  in  the  financial  world, 
with  its  reflection  in  all  business  life. 

Consumption  outstrips  production. — As  there  is  at 
this  time  very  little  inducement  for  capital  to  go  into 
production,  gradually  consumption  increases  faster 
than  production.  Excess  stocks  first  supply  these 
greater  requirements  but  this  is  only  temporary. 
Requirements  must  be  met  later  by  increased  pro¬ 
duction,  and  the  volume  of  business  then  increases 
decidedly.  , 

New  orders  first  reflect  betterment. — Competition 
must  arise  between  buyers  anxious  to  fill  orders 
before  there  can  be  any  rise  in  prices.  The  first 
sign  of  this  changing  condition  of  affairs  is  not 
found  in  the  clearinghouse  returns  but  in  new 
orders.  The  former,  however,  soon  follows,  and 


BUSINESS  CONDITIONS 


27 


some  time  afterwards  we  find  larger  loans  and  a 
small  decrease  in  the  reserve  percentage  of  the 
banks. 

Markets  bare  and  competition  sets  in. — The  in¬ 
creased  demand  now  discloses  the  fact  that  certain 
markets  are  understocked.  The  demand  is  greater 
than  the  supply  and  in  the  competition  that  fol¬ 
lows  prices  move  slowly  upward  in  those  lines  first 
affected. 

Capital  necessary  for  a  rise. — The  first  essential 
condition  for  a  rise  is  capital.  No  matter  how  favor¬ 
able  may  be  natural  conditions,  their  effectiveness 
is  contingent  upon  the  amount  of  loanable  capital  in 
sight.  This  great  loan  fund  is  most  essentially  an 
outgrowth  of  modern  conditions,  and  has  begotten 
modern  financial  methods.  Banks  are  merely  the 
reservoirs  that  contain  it. 

Other  features  also  necessary  for  a  rise. — Long 
continued  economies  practiced  by  the  people  result 
in  a  large  supply  of  cheaply  loanable  funds,  and 
these,  with  good  crops,  cheap  interest,  labor  and 
raw  materials,  cessation  of  political  agitations,  the 
return  of  confidence  (so  necessary  for  future  cred¬ 
its)  and  an  underproduction  are  the  advance  agents 
of  prosperity.  Increase  in  population  and  the  de¬ 
mand  that  goes  with  it  is  also  a  very  important 
factor,  and  hastens  the  upward  movement  in  those 
countries  that  are  growing  rapidly,  giving  them  an 
advantage  by  augmenting  their  recuperative  powers. 

Confidence  now  building  up  future  credits. — Back 
of  all  credit,  and  a  fundamental  condition  for  it,  is 
confidence;  and  this  confidence,  now  quietly  gener¬ 
ating,  is  preparing  the  way  for  future  credits. 


III. — Labor  Better  Employed  and  Prices 

Rising 


About  Four  Years  After  Commercial  Panic. 

[Note — These  conditions  last  occurred  in  189 7.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example,  they  may  he  expected  substantially  to  repeat 
themselves  about  1917.] 

RAILROADS  now  have  funds. — The  railroads, 
once  more  having  a  market  for  their  bonds 
and  stocks,  and  having  enforced  rigid  econo¬ 
mies  for  some  time  past,  are  now  in  a  posi¬ 
tion  to  make  repairs  and  replace  worn  out  equip¬ 
ment  and  rails.  The  work  is  at  first  confined,  how¬ 
ever,  to  what  is  strictly  necessary,  and  does  not  as 
yet  include  new  extensions.  These  will  come  later 
when  profits  appear. 

Prices  of  raw  materials  go  up. — The  greater  de¬ 
mand  and  competition  between  buyers  to  assure 
early  delivery,  finally  gives  the  producer  an  oppor¬ 
tunity  to  charge  a  higher  price — a  moderate  advance 
at  first,  but  increasing  as  he  has  to  pay  a  greater  in¬ 
terest  and  wage  rate,  and  becoming  still  greater  later 
on  as  the  necessities  of  life  advance  and  the  pur- 


BUSINESS  CONDITIONS 


29 


chasing  power  of  the  currency,  by  which  the  value  of 
his  product  is  measured,  decreases. 

Manufacturer  at  first  hurt  by  rise  in  materials.— 
This  rise  in  the  price  of  raw  materials  at  first  sub¬ 
tracts  from  the  manufacturer’s  profits,  as  he  is  not 
able  at  once  to  raise  his  own  prices  correspondingly 
(coming  in  competition,  as  he  must,  with  old  stocks 
on  hand)  but  he  does  it  shortly  thereafter  as  this 
old  supply  is  exhausted. 

Pig  iron  and  copper  among  fiS^st  to  rise. — Pig  iron 
and  copper  are  raw  materials  that  experience  an 
early  rise,  entering  as  they  do  into  the  manufacture 
of  so  much  that  is  necessary  for  the  daily  use  of 
the  consumer,  and  into  materials  sadly  needed  at  this 
stage  by  the  railroads  of  the  country,  such  as  struc¬ 
tural  iron  for  bridges,  rails,  electrical  supplies,  etc. 
For  this  reason  iron  has  been  called  the  barometer 
of  trade,  and  copper  might  be  added  of  late  years, 
since  its  uses  have  expanded  so  greatly.  Lumber 
and  coal  rise  later  and  in  a  less  degree.  Then  fol¬ 
lows  a  gain  in  cotton  goods.  These  are  among  the 
first  to  rise  in  the  line  of  manufactured  textiles,  be¬ 
cause  they  enter  so  largely  into  the  necessities  of 
both  rich  and  poor. 

Betterment  reflected  in  clearings,  and  buyers  in¬ 
crease  orders. — The  improving  conditions  are  first 
reflected  in  the  bank  clearings  of  the  South  and 
West,  the  home  of  raw  materials,  iron,  copper,  cot¬ 
ton  and  food  products.  All  these  are  basic  necessi¬ 
ties  and  the  surplusage  of  them  has  now  been  used 
up.  The  buyers  from  these  localities,  therefore,  are 
the  first  to  increase  orders,  and  this  gives  a  more 
cheerful  aspect  to  the  market. 

Many  doubt  improvement. — There  are  many 
doubting  Thomases  at  first  who  can  see  no  signs  of 


30 


HOW  TO  FORECAST 


betterment,  because,  while  our  crops  are  good,  there 
is  as  yet  no  large  return  flow  of  gold  from  abroad, 
and  business  conditions  reflect  no  marked  or  obvi¬ 
ous  betterment;  but  the  money  is  going  into  settling 
our  debts  at  home  and  abroad,  and  into  paying  for 
securities  returned  to  us  from  Europe.  Many  for¬ 
eign  holders  of  American  securities  foolishly  sell  on 
the  first  rises  in  the  stock  market,  to  regret  it  later 
after  conditions  have  improved,  when  they  buy  back 
at  much  higher  prices. 

Prosperity  now  starts  in  earnest. — It  is  when  this 
period  of  debt  paying  has  passed  that  prosperity 
starts  in  at  a  surprisingly  rapid  rate,  growing 
faster  all  the  time;  so  that  even  the  worst  pessimist, 
whose  whole  stock  of  small  talk  has  been  the  hard 
times,  is  finally  compelled  to  abandon  it. 

Wholesale  grocers  feel  betterment  before  cloth¬ 
iers. — Wholesale  grocers  receive  larger  orders  at  an 
early  date.  They  experience  the  improving  condi¬ 
tions  before  wholesale  clothiers,  as  clothing  can  be 
worn  when  old  but  food  must  be  replaced.  Dry- 
goods  do  not  feel  the  betterment  at  first,  outside  of 
the  increased  orders  for  cotton  goods  already  men¬ 
tioned. 

Human  nature  wisely  optimistic. — The  depressed 
period  has  now  lasted  a  long  time  and  has  been  a 
severe  strain  on  the  nerves  and  pocket  books  of  all 
of  us.  Human  nature  in  the  main  is  optimistic.  It 
was  wisely  made  so  by  the  great  Intelligence,  in 
order  for  mankind  to  look  ahead  and  plan,  and  first 
mentally  see  and  then  perform  the  great  undertak¬ 
ings  which  nature  is  always  calling  upon  us  to 
accomplish  in  order  to  better  our  condition.  It  is 
now  a  time,  with  basic  conditions  right  and  confi¬ 
dence  growing,  to  cast  aside  the  depression  of  the 


BUSINESS  CONDITIONS  31 

past,  to  look  again  on  the  bright  side  of  things  and 
to  gather  strength  for  the  work  before  us. 

Excess  money  now  loaned  and  credit  started. — 
The  great  excess  of  loanable  funds  in  bank  vaults 
acts  as  a  constant  stimulant  to  speculation,  and 
with  growing  confidence  and  improved  conditions, 
money  is  now  loaned  more  freely  and  profitably 
than  before,  and  so  helps  revive  the  element  of 
credit,  which  is  later  to  expand  to  enormous  pro¬ 
portions. 

First  rise  in  railroad  stocks  is  based  on  hopes. — 

The  first  advance  in  railroad  stocks,  which,  as  v/e 
have  seen,  precedes  the  rise  in  commodities,  is  al¬ 
ways  based  on  hopes  of  future  profits  to  the  rail¬ 
roads,  and  so  anticipates  any  actual  gain.  Rapidly 
diminishing  losses  at  this  time  are  an  early  indi¬ 
cation  of  the  impending  rise.  The  rise  in  stocks  is  a 
sort  of  reflection  of  improving  conditions  in  the 
business  world,  having  as  yet  no  actually  tangible 
basis  in  profits.  It  results  from  a  lively  apprecia¬ 
tion  of  what  is  to  come  and  is  therefore  more  or  less 
speculative. 

Freight  returns  better  while  passenger  still  poor. 

— The  actual  revival  in  railroad  business  first  ap¬ 
pears  in  increasing  freight  returns,  and  when  this 
starts  passenger  traffic  is  often  making  its  poorest 
showing,  due  to  the  fact  that  the  people  are  staying 
at  home,  attending  strictly  to  business,  and  con¬ 
ducting  it  after  the  most  economical  fashion.  They 
are  using  the  mails  rather  than  the  railroads  to 
secure  new  orders,  wherever  feasible,  and  traveling 
for  pleasure  alone  is  naturally  at  a  minimum. 

Money  market  gives  first  signs  of  improvement.— 
All  changes  for  the  better  from  time  to  time,  can  be 
early  noticed  in  the  money  market,  for  it  is  here  that 


32 


HOW  TO  FORECAST 


all  have  to  come  to  get  the  wherewithal  to  do  busi¬ 
ness  with;  and  the  condition  of  the  money  market 
is  soon  reflected  in  the  stock  market. 

Railroad  dividends  often  lessened  after  rise. — For 
some  months  after  the  rise  in  stocks  begins,  even 
prominent  railways  may  reduce  their  dividends,  for 
those  represent,  not  the  present  period,  but  the  past 
six  months  or  year.  This  fact  often  temporarily 
mystifies  and  disappoints  many  who  had  begun  to 
entertain  hopes  of  better  things  to  come. 

Rise  may  take  place  even  when  furnace  output  is 
decreasing.— Stocks  also  may  rise  on  ’change,  and 
often  do,  while  the  furnace  output  of  iron  is  still 
decreasing.  This  is  due,  as  already  explained,  to  the 
belief  that  adverse  conditions  are  changing  into 
favorable  ones.  The  shadow  of  coming  events  ap¬ 
pears  and  is  acted  upon. 

Rear  failures  now.— On  this  rising  market  there 
are  apt  to  be  failures  of  bear  operators.  For  a  long 
time  every  rise  in  the  market  has  been  followed  by 
a  fall,  and  generally  greater  than  the  rise  (during 
the  poor  times).  Many  speculators  do  not  yet 
appreciate  the  fact  that  the  gain  is  a  permanent  one, 
to  be  followed  by  still  greater  gains.  This  early  rise 
is  much  of  it  manipulative  and  is  financed  mostly  on 
borrowed  capital. 

Public  orders  first  come  from  outside  towns. — The 
first  sign  of  the  general  public  purchasing  stocks 
appears  from  out-of-town  orders,  from  localities 
nearer  to  the  raw  materials,  where  the  general  busi¬ 
ness  atmosphere  is  at  this  time  more  conducive  to 
optimism  than  in  a  large  city  like  New  York,  which 
is  still  suffering  from  the  long  continued  depression. 

Some  railroad  earnings  may  even  now  show 
losses.™ During  this  period  there  may  be  a  halt  in 


BUSINESS  CONDITIONS 


33 


the  net  earnings  of  some  railroads  and  even  a  falling 
off  for  a  short  time,  with  an  increased  gain  later  on. 
This  may  be  due  to  a  severe  winter,  or  strikes,  or 
politics,  or,  later  on,  to  the  more  important  factor 
of  a  rise  in  wages  and  commodities  that  temporarily 
counterbalances  the  gain  in  gross  business  shown 
by  railroad  returns. 

Overdo  it  at  first  in  other  lines  also. — Moreover, 
this  slight  reaction  is  not  confined  to  railroad  circles 
alone.  In  other  lines  the  same  reaction  occurs.  The 
people’s  hopes  and  their  eagerness  have  led  them  at 
first  to  overdo  things;  also  on  the  appearance  of  the 
first  new  orders  there  springs  up  a  fierce  competi¬ 
tion  for  a  short  time,  which  retards  advancement 
and  adversely  affects  prices. 

Trunk  lines  show  first  benefit  of  increased  earn¬ 
ings.— -It  is  the  decrease  in  expenses  and  the  econo¬ 
mies  practised  that  have  paved  the  way  for  in¬ 
creased  earnings,  not  only  for  the  railroads  but  in 
all  other  occupations  as  well.  It  is  generally  among 
the  trunk  lines,  so  called,  that  this  gain  is  first 
noticeable.  Formerly  new  railroad  construction  was 
one  of  the  most  important  indications  of  improv¬ 
ing  times.  This  is  not  now  so  great  a  feature  as  in 
the  past,  the  country  having  been  pretty  well  grid- 
ironed  by  roads,  but  the  expenditure  for  new  rails 
and  bridges  to  replace  the  old,  and  for  new  equip¬ 
ment,  is  greater  than  ever  before. 

Money  from  hiding  places,  new  banks,  etc. — As 
confidence  grows  money  comes  from  its  hiding 
places.  Also,  all  kinds  of  products  are  now  being 
grown  and  manufactured  more  freely.  It  is  the 
function  of  banks  to  put  both  money  and  products 
into  circulation,  and  there  gradually  spring  up 
throughout  the  country  many  new  banks  to  meet 


34 


HOW  TO  FORECAST 


these  growing  necessities.  Each  bank  creates  new 
currency  and  introduces  new  lines  of  credit  in  its 
vicinity,  thus  adding  greatly  to  business  activity. 
But  there  must  be  a  demand  for  banks  before  they 
are  organized;  and  the  creation  of  products  must 
precede  the  demand  for  their  circulation  by  the 
bank. 

The  relatively  low  prices  at  this  time  of  govern¬ 
ment  bonds,  which  are  used  by  the  national  banks 
as  a  basis  for  putting  new  notes  into  circulation, 
together  with  the  increasing  demand  for  money, 
make  it  profitable  for  old  banks  to  take  out  addi¬ 
tional  circulation  and  for  new  ones  to  organize. 

Public  likes  to  buy  on  rising  market. — We  have 
seen  that  the  rise  in  commodities  begins  early  in 
pig  iron,  while  the  finished  products  are  dull  for  a 
time  thereafter;  but  when  the  change  comes  in  the 
latter  it  is  very  rapid,  and  the  advance  in  prices 
stimulates  further  purchasing.  The  public  likes  to 
buy  on  a  rising  market,  as  they  think  there  is  an 
opportunity  to  make  money,  while  on  a  falling 
market  they  refrain  from  purchasing  till  the  last 
moment,  fearing  a  loss  and  desiring  to  buy  as 
cheaply  as  possible. 

Merchants  increase  orders. — When  times  improve 
merchants  place  larger  orders  and  later  on  antici¬ 
pate  their  wants,  as  successive  rises  in  prices  have 
taught  them  that  there  is  money  to  be  made  in  buy¬ 
ing  as  largely  as  possible.  At  this  time  life  insur¬ 
ance  companies  and  savings  banks  increase  their 
purchases  of  mortgages. 

Slight  cause  may  bring  temporary  reaction. — 

When  the  volume  of  business  has  increased  and 
prices  advance,  in  the  very  early  stages  of  a  pro¬ 
longed  rise,  a  comparatively  slight  cause  may  bring 


BUSINESS  CONDITIONS 


35 


about  a  temporary  reaction — as  too  sudden  a  gain, 
any  disturbing  political  or  financial  clouds  on  the 
horizon,  etc.  These  are  mere  incidents  in  the  up¬ 
ward  tendency,  birth  pains,  as  it  were,  foreshadow¬ 
ing  the  greater  prosperity  to  come. 

interest  rates  will  go  up  enough  to  offset  prices. — 
When  commodity  prices  are  rising,  the  interest  rate 
will  eventually  advance  an  amount  sufficient  to  off¬ 
set  the  loss  in  the  purchasing  power  of  the  principal, 
in  order  to  retain  the  proper  equilibrium.  The 
plethora  of  money  tempts  people  to  borrow,  thus 
creating  a  greater  purchasing  power;  and  these  pur¬ 
chases  increase  the  demand  for  money  to  produce 
and  circulate  them,  thus  raising  interest  rates. 

Public  now  eager  to  buy  on  advance. — The  rise  in 
prices  has  now  started  in  earnest,  and  the  public, 
which  required  long  continued  rising  values  before 
becoming  interested,  is  now  becoming  eager  to  pur¬ 
chase.  It  has  been  said  “that  a  shortage  of  five  per 
cent,  in  commodities  or  a  rise  in  demand  of  that 
amount  over  supplies,  starts  competitive  bidding 
that  may  raise  prices  as  high  as  fifty  per  cent/' 

Consumption  greater  than  production  for  a  time. — 
In  improving  times  consumption  is  greater  than  pro¬ 
duction  for  a  while,  so  that  in  order  to  perceive  the 
first  proof  of  changing  conditions  one  must  scan 
closely  the  consumptive  demands;*  also  outside 
conditions  and  happenings  may  have  a  great  influ¬ 
ence  for  the  time  being. 

Improvements  began  some  time  before  advance. — 

The  surplus  has  to  be  worked  off  before  any  better¬ 
ment  in  prices  can  take  place.  There  must  be 
plenty  of  orders  on  hand  and  a  scarcity  of  material 
to  fill  them  with.  The  betterment  commences  prob- 


*  Burton  on  Crises,  p.  171. 


36 


HOW  TO  FORECAST 


ably  six  months  before  the  rise  in  prices  begins. 
Increasing  prices,  therefore,  are  not  the  first  indi¬ 
cation,  The  restoration  of  confidence  awakens  the 
people  to  their  long  neglected  wants,  and  the  rise 
in  prices  that  follows  indicates  that  conditions  are 
reversing,  and  that  consumption  is  outstripping 
supply. 

Retailer  cannot  raise  prices  as  fast  as  wholesaler. 

—When  this  rise  in  prices  first  occurs  the  retailer 
is  at  a  disadvantage,  as  he  cannot  raise  prices  as 
fast  as  the  wholesaler.  He  has  to  begin,  as  it  were, 
a  campaign  of  education  along  that  line,  and  quietly 
accustom  the  public  to  paying  an  enhanced  price. 

Wages  last  to  rise — Labor  is  the  last  to  receive 
the  benefit  of  rising  prices  in  an  enhanced  wage,  but 
shows  it  almost  from  the  first  in  more  hands  em¬ 
ployed  and  longer  hours  of  work. 

Laborers  in  raw  materials  get  first  raise — The  first 
wages  to  be  raised  are  the  wages  of  those  who  are 
engaged  in  producing  raw  materials  and  manufactur¬ 
ing  them.  This  rise  is  not  important  until  competi¬ 
tive  bidding  sets  in  for  the  services  of  the  workmen, 
and  this  cannot  take  place  until  idle  labor  is  set  to 
work,  at  least  in  those  occupations  where  a  rise  is 
to  occur. 

Merchants,  etc.,  can  afford  to  pay  higher  interest. 

—As  prices  rise  merchants  and  manufacturers  can 
afford  to  pay  higher  rates  of  interest,  because  of  the 
profits  made  by  them  out  of  the  rising  commodity 
prices. 

A  little  income  property  bought. — Generally  three 
or  four  years  after  a  commercial  panic  there 
springs  up  a  small  demand  for  choice  income  prop¬ 
erty,  the  timid  capitalist  realizing  that  here  is  a 
solid  investment  that  cannot  “take  unto  itself  wings 


BUSINESS  CONDITIONS 


37 


and  fly  away.”  This  demand  is  small,  being  limited 
to  a  few  wise  investors,  most  of  whom  are  not  in 
business  but  who  have  money  in  the  bank  that  must 
now  be  put  to  work  to  earn  an  income  for  the 
owner.  Business  property  is  on  a  firm  basis,  the 
inflation  having  by  this  time  been  squeezed  out  of 
it,  but  not  yet  out  of  vacant  speculative  holdings. 

Speculation  raises  prices  of  grain  so  as  to  hurt 
exports. — At  an  early  stage  of  the  improvement 
speculation,  that  child  of  optimism,  which  is  ever 
with  us  watching  its  opportunity,  starts  in,  first  in 
stocks  and  then  in  agricultural  products,  and  raises 
prices,  until,  later  on,  prices  for  farm  products  be¬ 
come  so  high  and  our  consumptive  demand  so  great 
that  our  export  business  is  seriously  lessened.  Our 
foreign  customers  at  this  period  cannot  afford  to 
pay  the  enhanced  prices,  as  conditions  with  them 
have  not  improved  as  much  as  with  us.  This  for  a 
while  acts  as  a  deterrent  to  better  times,  as  it  tends 
to  prevent  sales  of  these  natural  products  and  the 
beneficial  effects  of  the  circulation  of  the  money 
their  purchase  price  would  yield;  but  conditions 
gradually  improve  abroad  and  prices  for  our  farm 
products  fall  somewhat,  so  that  at  this  time  such 
conditions  correct  themselves  without  serious  harm 
being  done. 

We  import  chiefly  raw  or  partly  manufactured 
materials. — Though  our  increasing  orders  for  their 
wares  materially  help  the  foreigner  from  now  on, 
these  increased  orders  at  first  are  mainly  for  goods 
only  partly  manufactured  or  for  raw  products  that 
we  can  manufacture  here. 

Stages  of  progression. — We  will  here  repeat  the 
various  stages  of  progress  in  mercantile  circles  that 
take  place  at  this  time.  A  working  off  of  the  sur- 


38 


HOW  TO  FORECAST 


plus  through  an  increase  in  new  orders  is  the  first 
indication,  and  precedes  a  rise  in  prices.  More  work¬ 
men  employed  and  at  longer  hours  go  before  an  ad¬ 
vance  in  wages.  Railroad  repairs,  betterments  and, 
later,  extensions  or  branches.  Existing  facilities  for 
manufacture  and  for  office  quarters  are  gradually 
taxed  to  the  utmost.  This  is  followed  by  enlarge¬ 
ment  of  these  facilities,  with  the  idea  of  reducing 
cost  by  producing  more  and  at  less  expense,  as 
through  new  machinery,  improved  business  facili¬ 
ties,  and  the  like. 


IV. — Good  Times 


About  Five  Years  After  Commercial  Panic. 


[Note — These  conditions  last  occurred  in  1898.  If 
the  next  commercial  panic  takes  place  in  191 3,  for 
example,  they  may  he  expected  substantially  to  repeat 
themselves  about  1918.] 

Active  rise  in  prices  now. — When  the  steps 
previously  explained  have  been  taken  and 
consumption  still  outstrips  production,  then 
comes  an  active  rise  in  prices,  instead  of  the 
cessation  of  price  cutting,  which  was  the  earlier 
sign.  New  factories,  new  machinery,  new  office 
quarters  and  the  like  are  created  to  meet  the  con¬ 
sumptive  demand,  which  by  this  time  is  increasing 
faster  than  it  can  be  provided  for.  Those  things 
rise  first  which  are  most  easily  and  speedily  mar¬ 
keted. 

Labor  more  fully  employed  than  capital. — Labor  is 
fully  employed  before  capital  is,  so  that  now  labor 
has  the  advantage,  but  ere  long  capital  finds  avenues 
in  which  to  employ  itself.  Labor,  having  now  the 
advantage  of  competitive  bidding  for  its  hire,  experi¬ 
ences  its  first  material  rise  and  the  country  is  pros¬ 
perous. 


40 


HOW  TO  FORECAST 


Next  wage  rise  in  unskilled  city  laborers. — The 

rise  in  wages  takes  place  now  among  the  unskilled 
masses  in  the  cities,  those  who  do  the  preliminary 
work,  as  it  were,  connected  with  the  necessaries  of 
life.  Later  arises  the  demand  for  workers  upon 
those  articles  that  are  more  expensive,  and  finally 
upon  luxuries. 

Rise  in  wages  helps  raise  prices. — The  rise  in 
wages  acts  as  a  stimulant  to  raise  prices,  not  only 
by  adding  to  the  cost  of  production,  but  also  by  giv¬ 
ing  a  greater  purchasing  power  to  the  laboring 
classes. 

Merchants  enlarge  their  credit  to  buy  goods. — 

Under  the  stimulus  of  rising  prices  the  wholesaler 
and  retailer,  desirous  of  making  all  the  profits  they 
can  through  the  continuing  rise,  order  more  and 
more  goods,  enlarging  their  credit  for  the  purpose 
and  so  greatly  increasing  the  demand  for  money. 

Speculation  grows  on  profits  realized. — At  first  the 
use  of  money  is  confined  mostly  to  strictly  produc¬ 
tive  enterprise,  but  prospective  profits  have  ever 
acted  as  a  spur  to  speculation,  so  that  the  latter 
soon  grows,  modestly  at  first,  but  later  to  over¬ 
shadow  everything  with  its  excesses. 

Capital  loses  its  timidity. — The  field  of  operations 
must  be  attractive  to  induce  capital,  which  is  still 
timid,  to  enter,  and  these  attractions  must  quietly 
increase  and  capital  must  realize  its  profits  again 
and  again  before  it  finally  loses  its  timidity,  and 
becomes  in  the  end  overbold,  overconfident,  beget¬ 
ting  a  rashness  of  investment  that  in  the  future  is 
to  prove  its  undoing. 

What  increases  in  clearings  indicate. — The  first 
decided  increase  in  bank  clearings  indicates  stock 
speculation  and  some  investing,  and  later  an  in- 


BUSINESS  CONDITIONS 


41 


creased  volume  of  general  business.  Still  further 
on  the  rise  of  commodity  prices  adds  to  the  volume 
of  clearings,  as  transactions  in  the  same  quantity  of 
a  commodity  are  represented  by  more  money,  owing 
to  the  higher  price. 

Benefits  of  crops  felt  mostly  after  opening  of  new 

year. — Good  crops  and  fair  prices,  as  we  have  seen, 
aid  greatly  toward  better  times,  but  as  fall  crops 
are  not  gathered  until  late  in  the  season,  we  do  not 
fully  experience  their  beneficial  effects  until  after 
the  opening  of  the  new  year.  They  are  then  en 
route  to  market  and  the  return  flow  of  money  in 
exchange  for  them  slowly  circulates  through  the 
various  arteries  of  business  life. 

Cheerful  tone  to  business. — The  cheerful  tone  that 
now  pervades  all  business  is  healthful  and  refresh¬ 
ing,  a  most  gratifying  change  from  the  depression 
and  ever  deepening  gloom  of  the  last  few  years. 

Interest  depends  on  profits  made.™ Bankers  and 
investors  are  now  able  to  get  satisfactory  interest  on 
their  capital.  The  interest  market,  like  the  wage 
market,  depends  not  so  much  on  the  volume  of 
money  in  circulation  as  on  the  profits  made.  It  is 
out  of  the  fund  of  value  created  that  both  capital 
and  labor  must  receive  their  shares,  and  the  larger 
the  fund  the  larger  the  return  in  both  interest  and 
wages.  At  this  period  the  reservoir  from  which  they 
both  grow  is  steadily  augmenting. 

Confidence  necessary  for  credit  building. — Confi¬ 
dence  is  a  basic  necessity  for  all  credit  building;  and 
the  gradual  growth  of  confidence  is  accompanied  by 
a  corresponding  increase  in  credits,  which  helps  the 
money  market,  gives  a  stimulus  to  business,  and 
later,  as  we  shall  see,  results  in  excesses  which 
eventually  bring  about  its  own  destruction. 


42 


HOW  TO  FORECAST 


What  failures  indicate. — One  of  the  early  signs 
of  improvement  was  that  total  liabilities  in  failures 
were  smaller  but  the  number  of  failures  larger, 
showing  that  failures  were  confined  to  the  little 
fellows,  while  the  concerns  doing  a  larger  business 
were  at  least  holding  their  own.  The  next  step  is 
that  failures  become  smaller  both  in  number  and  in 
liabilities,  showing  that  the  strain  under  which  they 
have  been  laboring  for  years  past  is  now  being  re¬ 
moved  from  all  classes. 

Employers  slow  to  employ  new  labor. — Employers 
at  first  hesitate  to  employ  more  hands  or  raise  exist¬ 
ing  wages;  when  they  do,  it  is  an  indication  that  the 
betterment  has  existed  some  little  time.  It  is  often 
when  labor  is  complaining  the  most  that  a  change 
for  the  better  has  set  in.  Labor,  as  wages  begin  to 
rise,  gives  very  little  trouble  for  a  while,  as  the 
workman  is  continuously  employed  and  often  at  an 
enhanced  wage.  He  is  fairly  well  satisfied,  and 
prices  have  not  yet  risen  enough  to  affect  his  buying 
capacity. 

Western  and  Southern  buyers  first  to  give  larger 
orders. — In  drygoods  the  first  sign  of  improvement 
is  in  the  orders  of  Southern  and  Western  buyers; 
but  while  the  commodity  rise  commences  in  the 
West,  it  is  overshadowed  for  some  time  to  come  in 
the  bank  clearings  of  the  country  as  a  whole  by  the 
increasing  stock  dealings  of  the  East. 

Test  as  to  improvement. — The  true  test  as  to  the 
extent  of  the  business  improvement  comes  after  the 
first  enthusiasm  passes  away.  “At  first  there  is  a 
tendency  to  overbuy,  due  to  a  feeling  of  optimism 
(tinctured  by  speculation);  the  rebound,  therefore, 
often  goes  too  far,  and  now  it  is  up  to  the  purchas¬ 
ing  capacity  of  the  small  consumer  to  help  the  deal- 


BUSINESS  CONDITIONS 


43 


ers  out.  This  is  the  supreme  test  of  business  im¬ 
provement,  and  is  even  more  true  in  stocks.” 

Railroads  accumulate  a  surplus. — At  as  early  a 
period  as  possible  some  of  the  railroads  adopt  the 
policy  of  accumulating  by  adding  to  their  surplus,  in 
order  to  inspire  confidence  in  their  stock  issues. 

Imports  of  certain  luxuries.-— A  further  gain  in 
imports  indicates  a  continued  growth  in  the  pur¬ 
chasing  power  of  the  people.  We  are  now  not  only 
importing  for  manufacturing  purposes,  as  before,  but 
the  more  necessary  classes  of  luxuries  as  well  are 
coming  into  demand. 

How  in  early  times  we  paid  for  imports. — At  an 

early  stage  in  our  history,  as  with  all  new  countries, 
we  were  debtors,  and  imports  exceeded  exports,  the 
balance  being  made  up  by  the  sale  abroad  of  inter¬ 
ests  in  our  resources.  At  first  we  sold  our  raw 
products  and  broad  acres  direct,  but  later  sales  were 
mostly  in  the  shape  of  stocks  and  bonds,  as  that  is 
the  most  convenient  modern  form  of  transferring 
ownership. 

Later  exported  more  than  we  imported. — As  we 

gradually  acquired  the  means  to  develop  our  re¬ 
sources  we  exported  more  than  we  imported,  and 
this,  because  of  our  great  natural  wealth,  brought 
money  in  ever  increasing  amounts  to  our  shores. 

Old  nations  have  excess  of  imports. — As  the  re¬ 
sources  of  old  nations  are  mostly  developed,  they, 
like  a  very  young  nation,  import  more  than  they 
export,  and  the  balance  is  paid  out  of  interest  or 
principal  owing  to  them  from  abroad,  as  in  the  case 
of  England.  They  also  sell  to  the  newer  country 
the  products  of  their  factories;  for  as  each  nation 
passes  the  earlier  stages  it  goes  more  heavily  into 
manufacturing,  because  <5f  its  abundant  supply  of  labor. 


44 


HOW  TO  FORECAST 


How  large  supply  of  gold  acts. — The  increase  in 
the  supply  of  gold  at  first  reduces  interest  rates,  but 
as  it  gets  into  circulation  it  creates  employment  for 
itself,  the  demand  that  springs  up  is  greater  than 
the  supply,  and  interest  rates  advance — especially 
as  speculation,  v/hose  very  life  blood  money  is, 
starts  in  and  gradually  increases.  The  banker  avails 
himself  of  the  increasing  supply  of  gold  to  make  it 
the  basis  of  credit.  In  the  bank  statement  later  on 
this  credit  appears  as  “deposits.”  The  new  gold 
affects  first  the  prices  of  bonds  and  stocks,  next  the 
most  necessary  commodities,  as  wheat,  cotton,  corn, 
iron,  steel  and  copper;  later  it  affects  all  lines. 


V.-  “Public  Demand  for  Stocks 


About  Six  Years  after  Commercial  Panic. 


[Note — These  conditions  last  occurred  in  1899.  If 
the  next  commercial  panic  takes  Place  in  1913,  for 
example,  they  may  be  expected  substantially  to  repeat 
themselves  about  1919.] 

DIFFERENCE  between  the  public  and  invest¬ 
ors.— A  clean  cut  distinction  should  be 
drawn  between  the  investing  class  and  the 
public  in  general.  Investors  are  attracted 
by  low  values,  safety  and  good  interest  yield.  The 
public  go  into  stocks  chiefly  from  speculative  mo¬ 
tives.  With  the  public,  value  cuts  but  little  figure. 
What  they  desire  is  a  rapid  rise  in  prices,  and  quick 
returns,  often  with  little  regard  for  intrinsic  value. 
Rising  prices  long  continued  awaken  their  cupidity, 
and  about  this  time  they  begin  to  make  their  ap¬ 
pearance  on  ’change — veritable  “lambs,”  as  they  are 
so  aptty  called. 

Beginnings  of  Stock  Exchange. — “It  was  on  May 
1 7,  1792,  that  twentj^-four  brokers  met  under  a  tree 
which  grew  on  a  spot  opposite  60  Wall  Street,  and 
signed  an  agreement  regarding  a  uniform  rate  of 


46 


HOW  TO  FORECAST 


commission,  and  afterward  held  irregular  meetings 
at  the  Tontine  Coffee  House,  Wall  and  Water 
Streets.  This  was  the  beginning  of  the  Stock  Ex¬ 
change.  In  1817  it  was  formally  organized  in  the 
Merchants  Exchange  Building,  now  the  Custom 
House.  Ever  since  then  New  York  has  been  the 
headquarters ,  of  the  speculative  tendencies  of  the 
country,  with  its  great  exchanges  to  facilitate  the 
transfer  of  securities  and  commodities  of  all  kinds. 

Clearinghouse  system  adopted. — “It  was  not  till 
1890  that  they  adopted  a  clearing  house  system, 
when  they  awoke  to  the  fact  that  instead  of  having 
to  carry  bank  deposits  to  pay  for  stocks  bought 
and  sold,  all  that  was  necessary  to  carry  was  the 
balance  between  the  two,  and  this  was  less  than  one- 
fortieth  of  the  whole  amount.”* 

Why  bonds  and  stocks  rise  first. — As  stocks  and 
bonds  are  in  a  much  more  negotiable  shape  than  an 
interest  in  a  business  enterprise  not  thus  divided, 
and  consequently  are  easier  to  buy  and  sell  and 
more  interesting  to  the  speculator,  they  rise  first 
and,  naturally,  sooner  reach  the  limit  of  their  rise, 
and  are  consequently  the  first  to  fall  later  on.  Also, 
the  public,  being  timid,  prefer  to  invest  in  stocks  and 
bonds  because,  in  the  main,  these  securities  repre¬ 
sent  old  and  tried  undertakings. 

Stock  rises  always  started  by  manipulators. — 
Stock  rises  have  ever  been  started  by  manipulators, 
aided,  of  late  years,  by  the  purchases  of  a  small  class 
of  investors  who  study  values  closely.  The  general 
public  will  not  come  in  until  after  prices  continue  to 
rise  for  some  time.  This  the  professional  under¬ 
stands  and  it  is  this  inducement  that  he  skilfully 
offers  them  from  time  to  time.  If  his  efforts  are 


*  Securities  as  a  Means  of  Payment,  by  C.  A.  Conant. 


BUSINESS  CONDITIONS 


4? 


continued  long  enough  he  will  be  successful  and  the 
public  will  buy.  quietly  at  first,  but  with  a  rush  later 
on. 

Public’s  surplus  funds  go  into  stocks. — At  first 
stock  investments  are  made  from  the  surplus  funds 
of  the  public  and  hence  are  by  far  the  greatest  at 
this  time,  after  a  long  period  of  enforced  saving. 
Business  in  general,  while  better,  does  not  offer  as 
yet  sufficient  inducement  to  idle  capital;  hence  these 
surplus  funds  for  some  time  past  have  been  gradu¬ 
ally  seeking  Wall  Street.  Stocks  and  bonds  at  this 
time  pay  a  higher  rate  of  interest  than  can  be  ob¬ 
tained  in  general  business.  Moreover,  as  business 
now  requires  a  relatively  small  part  of  the  funds 
seeking  employment,  New  York  banks  are  able  to 
offer  to  their  outside  correspondents  a  rate  of  inter¬ 
est  that  causes  a  vast  sum  of  money  to  accumulate 
in  New  York  at  the  disposal  of  Wall  Street;  hence, 
later,  the  great  rise  that  takes  place  and  the  many 
new  companies  formed.  At  no  other  time  in  the 
evolution  of  the  cycle  does  Wall  Street  ever  interest 
the  public  so  greatly,  or  have  such  vast  sums  at  its 
disposal. 

Speculators  want  action. — Rapid  fluctuations  in 
market  prices  of  stocks  are  attractive  to  the  specula¬ 
tor,  as  he  loves  “action,”  and  when  values  are  ad¬ 
vancing,  having  idle  money,  and  having  chafed 
through  a  long  enforced  repression  of  his  energies, 
the  inducements  offered  in  this  field  prove  vastly 
attractive  to  him. 

Why  stocks  are  so  susceptible  to  influences.— 

Stocks  fluctuate  more  than  commodities  and  offer 
less  resistance  to  surrounding  influences,  because 
their  price  depends  on  the  rate  of  dividend  they  pay. 
This  being  the  fact,  they  come  into  competition  with 


48 


HOW  TO  FORECAST 


the  market  rates  of  interest,  which  change  from  day 
to  day;  and  if  these  rates  change  in  any  great  de¬ 
gree — because  of  a  temporary  stringency,  a  political 
happening,  some  important  act  of  nature,  etc. — the 
change  is  reflected  almost  at  once  in  stocks. 

Why  commodities  are  slower  to  rise. — Commodi¬ 
ties  are,  as  a  rule,  slower  in  moving  and  so  take 
longer  time  to  be  affected.  Most  events  have  passed  by 
before  they  have  time  to  change  commodity  prices 
to  any  important  extent.  The  cause  of  the  disturb¬ 
ance  has  to  be  great  and  to  continue  some  time  in 
order  to  affect  commodities.  The  elements  of  labor, 
raw  material,  railroad  rates  and  the  like,  all  enter 
into  commodity  prices,  in  addition  to  interest  on 
capital  invested.  An  exception  to  this  rule  some¬ 
times  occurs  in  a  time  of  general  panic,  when  public 
fear  may  cause  commodity  prices  to  fall  quickly. 

Public  often  erroneously  credited  with  good  sense. 
— The  public  forget  the  losses  of  the  past  and  go 
down  to  Wall  Street  as  to  a  Mecca.  They  are  too 
often  credited  with  exercising  good  sense  and  learn¬ 
ing  from  the  losses  of  the  past,  when  as  a  matter 
of  fact,  the  cause  may  be  either  that  their  purchasing 
powers  are  impaired,  or  that  interest  returns  on  the 
investment  are  not  sufficient,  or  that  they  can  do 
better  elsewhere. 

Hopeful  feeling  runs  into  speculation. — On  a  ris¬ 
ing  market  such  as  now  exists  in  stocks,  every  one 
interested  is  hopeful  and  success  breeds  confidence; 
and  if  long  continued  this  increasing  hopeful  feeling 
seeks  expression  in  speculation,  for  it  needs  must 
have  some  outlet. 

Lambs  make  money. — In  the  early  part  of  this 
movement  the  lambs,  perhaps  for  the  only  time  in 
the  financial  cycle,  have  an  opportunity  to  make 


BUSINESS  CONDITIONS 


49 


money  in  Wall  Street.  Their  purchases  are  so  large 
and  so  continuous  and  the  volume  of  their  savings  is 
so  great  that  they  force  stocks  steadily  up.  The  sea¬ 
soned  operator,  after  every  fair  rise,  looks  for  a  re¬ 
action  and  buys  and  sells  accordingly;  but  there  is 
no  reaction  to  speak  of  for  a  long  time  because  of 
the  enormous  sums  pouring  steadily  into  the  market, 
so  that  his  profits  at  this  time  often  do  not  equal 
those  of  the  lamb. 

Europe  sells  us  our  stocks. — Europe,  tempted  by 
the  higher  prices  and  needing  the  money  more  than 
we  do,  is  apt,  on  this  advance,  to  sell  us  stocks  in 
large  amounts.  But  this  has  surprisingly  little  effect 
upon  the  market,  so  great  is  the  investing  and  spec¬ 
ulative  movement  and  the  purchasing  power  of  the 
masses. 

Shortage  of  stocks.— Later,  to  the  surprise  of  all, 
the  demand  for  securities  exceeds  the  supply,  enor¬ 
mous  as  it  has  seemed  in  the  past.  Stocks  are  stead¬ 
ily  withdrawn  from  the  market  and  blocks  are  taken 
up  by  financial  heavyweights.  The  quiet  growth  of 
the  country  in  wealth  has  overtaken  the  supply  of 
securities,  and  promoters  busy  themselves  and  sup¬ 
ply  the  demand  on  terms  very  liberal  to  themselves. 

Good  news  sought  for,  bad  unheeded. — On  an 
improving  market  good  items  of  news  are  eagerly 
sought  for  and  made  the  most  of,  whereas  bad  news 
seems  to  fall  on  inattentive  ears;  and  the  reverse  is 
true  in  periods  of  declining  values. 

Investing  class  increasing. — The  investing  class 
are  constantly  increasing,  as  our  country  matures, 
at  the  expense  of  the  speculative  element.  As  the 
country’s  wealth  grows  more  substantial  investors 
will  ever  exercise  an  increasing  and  beneficial  influ¬ 
ence  on  the  stock  and  bond  market,  as  they  are 


50 


HOW  TO  FORECAST 


strongly  opposed  to  speculative  managements  and 
dishonest  methods  and  in  favor  of  a  conservative 
building  up  of  values,  with  wise  forethought  for  the 
dull  days  sure  to  come  later  on. 

From  the  very  nature  of  their  methods  they  are 
bound  to  flourish  and  increase  at  the  expense  of  the 
rash  and  often  foolhardy  speculative  element.  Spec¬ 
ulators  are  far  better  suited  to  a  new  country,  with 
its  great  natural  resources,  which  require  more  or 
less  chance-taking  for  development;  but  speculative 
methods  stand  little  show  of  success  (barring  a  very 
few  exceptions)  when  opposed  to  the  wiser  methods 
of  the  true  investor. 

Ninety-five  per  cent,  of  business  on  credit.— 

Ninety-five  per  cent,  of  the  business  of  the  country 
is  done  on  credit,  and  as  Wall  Street  is  the  financial 
center  of  our  country,  it  is  there  that  the  machinery 
of  credit  is  regulated;  hence  the  importance  of  Wall 
Street  in  business  organization. 

Credit  system  demands  honesty  in  business.— 
This  great  increase  in  the  use  of  credit  instead  of 
money  will  hereafter  unceasingly  demand  a  greater 
degree  of  honesty  in  business  life.  Credit  must  de¬ 
pend  on  confidence.  The  recent  outbreak  of  indig¬ 
nation  against  the  dishonest  practices  that  have  oc¬ 
curred  in  Wall  Street  for  years  past  and  heretofore 
have  been  only  casually  noticed,  is  in  a  measure  an 
instance  of  this  demand,  and  will  continue  until 
financial  operations  are  conducted  on  a  basis  that 
will  inspire  confidence. 

Credit  expanding  and  more  goods  bought. — At 

this  period  in  the  cycle  credit  is  expanding,  and 
with  the  increasing  volume  of  business  and  the  ad¬ 
visability  of  carrying  large  stocks  because  of  enhanc¬ 
ing  values,  many  abandon  their  former  conservative 


BUSINESS  CONDITIONS 


51 


methods  of  doing  business  on  a  cash  basis  and  tak¬ 
ing  advantage  of  the  cash  discount,  which  was  more 
or  less  of  a  necessity  in  hard  times  if  profits  were 
to  be  made.  They  now  make  use  of  the  credit  of¬ 
fered  them  and  buy  more  freely.  This  is  one  of  the 
great  factors  in  improving  times;  for  money,  as  we 
have  seen,  can  be  very  plentiful,  yet  the  times  be 
very  hard. 

Public,  now  possessed  of  credit,  buys  first  bonds, 
then  stocks. — Bank  deposits,  checks,  bills  of  ex¬ 
change,  cable  transfers,  book  accounts,  bonds  and 
n«tes  are  some  of  credit’s  efficient  agents.  Pos¬ 
sessed  of  these,  buyers  investigate  the  opportunities 
offered  to  them  for  investment.  As  we  have  seen, 
they  are  invariably  attracted  first  to  the  bond  mar¬ 
ket;  then,  as  bonds  go  up,  and  interest  rates  for 
money  at  the  same  time  increase,  they  desert  bonds 
for  stocks,  which  not  only  pay  a  better  rate  of  in¬ 
terest,  but  have  the  additional  advantage  of  partici¬ 
pating  in  the  profits  resulting  from  rising  values. 
This  introduces  an  element  of  speculation  which 
bonds,  with  their  fixed  interest  rates,  lack. 

Stocks,  not  bonds,  get  the  increased  profit.— -The 
greater  the  amount  of  bonds  outstanding  against  a 
corporation,  the  greater  the  percentage  of  profits 
coming  to  the  stock  as  prosperity  advances;  for  the 
bond,  with  its  fixed  interest  rate,  cannot  participate 
in  the  increased  earnings.  The  stock  gets  all  the 
increase. 

Demand  for  small  currency. — A  demand  for  small 
currency  at  this  time  indicates  that  the  minor  trades¬ 
men  and  working  classes  are  doing  better,  that  they 
have  money  to  keep  in  their  tills  and  to  carry  about 
on  their  persons.  This  demand  is  ultimately  so 


HOW  TO  FORECAST 


62 

great  that  it  results  in  the  government  printing  new 
issues  of  small  denominations. 

Circulation  increases  and  raises  prices.— The  eager 
hunt  for  gold  and  silver  during  the  hard  times  has 
resulted  now  in  a  large  additional  coinage.  This, 
together  wdth  the  increased  circulation  taken  out 
by  banks,  adds  greatly  to  the  improving  conditions 
and  enhances  prices.  John  Stuart  Mill  goes  so  far 
as  to  say  on  this  subject  that  “If  the  whole  money  in 
circulation  has  doubled  prices  would  be  doubled. 
*  *  *  A  great  increase  in  money  is  a  certain 

harbinger  of  greater  business,  rising  prices  and  in¬ 
creasing  production.”  It  is  this  great  increase  in  the 
gold  output  that,  later  on,  makes  prices  appear  to 
be  on  a  higher  basis  than  they  really  are. 

Low  exchange  rate  indicates  credit  balance  drawn 
on. — -A  low  rate  of  exchange  at  this  time,  with 
steady  gaining  in  percentage  of  imports  over  ex¬ 
ports,  indicates  that  our  credit  balance  abroad  is 
being  drawn  upon.  As  home  consumption  outruns 
production  prices  go  up  and,  from  then  on,  the 
increase  in  per  cent,  of  shipments  gradually  favors 
imports  as  against  exports. 

Railroads  increase  both  earnings  and  bond  is¬ 
sues. — Railroads  now  not  only  show  an  increase 
in  gross  earnings,  but  a  larger  per  cent,  of  gain  in 
net,  indicating  better  business  combined  with  econ¬ 
omy  of  management.  There  is  peace  between  the 
various  railroads  now  because  there  is  a  larger  vol¬ 
ume  of  traffic,  sufficient  for  all,  and  therefore  no  oc¬ 
casion  for  fighting  and  rate  cutting.  The  volume  of 
borrowing  is  now  greatly  increased  by  railroads 
converting  their  short  time  notes  into  long  time 
bonds,  and  adding  new  issues  for  necessary  better¬ 
ments  and  for  their  steadily  increasing  expenses. 


BUSINESS  CONDITIONS 


53 


Industrial  companies  gain  more  slowly  .—Indus¬ 
trial  companies  do  not  reflect  improving  times  as 
quickly  as  one  would  anticipate,  because  they  have 
not  only  had  old  stocks  to  work  off,  in  which  there 
is  but  little  profit,  but  they  have  orders  to  fill  which 
were  taken  some  time  ago  when  times  were  dull  and 
prices  lower,  which  also  yield  but  little  profit. 

Imports  increase. — Having  reached  this  degree  of 
prosperity,  we  may  export  a  moderate  amount  of 
gold,  as  we  set  a  lower  value  on  it  than  do  those 
countries  not  so  far  advanced  towards  prosperous 
times.  We  have  passed  through  the  anxious  stage, 
have  ceased  to  hoard,  and  are  disposed  to  purchase 
more  goods  abroad..  Much  of  the  merchandise  thus 
imported  is  composed  of  materials  for  manufacturing 
purposes.  Of  course  gold  is  the  only  kind  of  money 
we  can  settle  our  foreign  obligations  with,  and  mod¬ 
erate  exports  at  this  time  are  not  to  be  viewed  with 
alarm,  as  the  return  flow  will  soon  set  in. 

Railroads  now  call  for  raw  materials.— Money  is 
now  readily  procurable  in  railroad  circles  through 
the  sale  of  securities;  and  the  urgent  necessity  of 
the  roads  for  repairs  and  for  additional  rolling  stock, 
owing  to  the  increase  in  population  that  has  been 
going  on  for  years  in  contiguous  territory,  leads  to 
a  general  railroad  building  and  repairing  movement. 
This  causes  a  demand  for  labor  and  materials  and 
for  iron  and  coal,  and  hence  a  demand  for  iron  and 
coal  mines.  Likewise,  improving  business  creates  a 
demand  for  new  gold  and  silver  mines,  and  new 
discoveries  of  copper  mines  follow  the  increasing 
use  of  copper  in  the  building  of  electric  roads,  elec¬ 
tric  light  and  power  companies,  etc. 

Money  remains  cheap. — Money,  though  now  used 
in  such  vast  quantities,  at  first  remains  cheap,  to  the 


54 


HOW  TO  FORECAST 


surprise  of  every  one,  the  banker  included.  The 
constant  percolation  of  money  into  the  banks  from 
many  sources  freshens  the  supply,  and  is  the  best 
indication  of  the  quiet  but  great  accretion  of  wealth, 
and  the  vast  liquidation,  that  have  quietly  taken 
place  during  the  hard  times.  Some  of  this  money 
has  perhaps  been  in  hiding  for  years.  Gold  imports 
from  abroad  also  increase  our  supply  of  cash. 

Clearings  reflect  better  times. — Improving  times 
are  reflected  in  the  bank  clearings  of  the  day;  a 
steady  fall  in  cash  and  a  rise  in  loans  now  indicate 
increasing  business  and  enhancing  values.  Cash  is 
now  passing  more  rapidly  from  hand  to  hand  in 
circulation,  instead  of  remaining  idle  in  the  banks 
as  formerly. 


VI.-— Era  of  Stock  Speculation  to  Secur¬ 
ities  Panic 


Six  to  Ten  Years  after  Commercial  Panic. 


[Note. — These  conditions  last  occurred  1899-1903.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example,  they  may  he  expected  to  repeat  themselves 
about  1919-1923.] 

COMMODITIES  and  equities  rise  in  value. — 

As  money  increases  in  volume  and  circula¬ 
tion  prices  of  commodities  and  of  all  securi¬ 
ties  possessing  equities  (as  distinguished 
from  bonds  or  mortgages  covering  only  a  fixed  and 
invariable  hen)  tend  to  rise. 

Rising  prices  make  South  and  West  active. — Ris¬ 
ing  prices  and  money  in  abundance  start  the  West 
and  South  everywhere  at  work  developing  their  nat¬ 
ural  resources.  Improving  times  abroad  are  re¬ 
flected  in  business  circles  here  by  an  increasing  de¬ 
mand  for  our  products,  modest  at  first  but  steadily 
growing. 

Increasing  speculation  demands  European  gold.— 

Increasing  volume  of  speculation  creates  a  demand 


56 


HOW  TO  FORECAST 


for  money.  The  golden  tide  is  reversed,  and  com¬ 
mences  to  flow  in  steadily  increasing  volume  to  our 
shores  from  Europe  under  the  stimulus  of  the  higher 
interest  paid  here.  Gold  naturally  seeks  those  coun¬ 
tries  where  capital  and  industry  are  the  best  organ¬ 
ized,  where  natural  resources  are  the  greatest,  and 
where  the  greatest  returns  are  coupled  with  a  rea¬ 
sonable  degree  of  safety  of  principal.  These  borrow¬ 
ings  grow  so  extensive  that  the}'-  become  the  great 
factor  in  finally  turning  a  credit  into  a  debit  balance 
against  us  abroad. 

Easy  security  markets  finance  business  undertak¬ 
ings. — This  easy  market  for  new  and  old  securities 
alike  facilitates  greatly  all  business  and  railroad 
operations  and  finances  our  great  undertakings. 
There  is  a  marked  and  natural  tendency  at  this  pe¬ 
riod  of  the  cycle  toward  financial  concentration  to 
meet  the  requirements  of  the  times.  As  the  country 
grows  and  business  organization  develops,  larger 
and  larger  sums  of  money  are  required  to  finance 
important  enterprises.  Large  organizations  are 
more  desirable,  effective  and  economical  than 
smaller  ones,  as  great  savings  can  be  effected  in 
purchases  of  raw  material,  in  manufacturing,  and  in 
placing  goods  on  the  market,  where  capital  and  vol¬ 
ume  of  business  are  large. 

The  people’s  money  makes  the  financier. — It  is  for 
the  most  part  the  money  of  the  people  accumulated 
in  banks  and  trust  companies  that  supplies  the  funds 
to  negotiate  these  great  undertakings,  and  not  the 
money  of  any  rich  individual  or  coterie  of  capitalists. 
On  the  contrary,  it  is  the  use  of  the  people’s  money 
that  has  created  the  multimillionaire,  and  without 
this  fund  to  draw  from  he  would  never  have  ex¬ 
isted. 


BUSINESS  CONDITIONS 


57 


Great  gold  output  helps  keep  up  agricultural 
prices. — The  great  output  of  gold  and  increased  is¬ 
sues  of  other  currency  during  this  period  help  make 
better  times  by  raising  prices.  This  is  especially 
important  as  affecting  the  prices  of  agricultural 
products,  which  always  form  the  most  essential 
foundation  for  real  prosperity. 

This  is  best  time  for  majority. — The  best  period 
for  the  majority  of  our  people,  and  the  healthiest 
financially,  is  now,  before  stock  prices  have  gone 
too  high,  and  before  the  period  of  excessive  specula¬ 
tion  and  extravagance  has  begun.  Debts  have  been 
paid  and  all  are  remuneratively  employed.  Fru¬ 
gality,  temperance  and  the  greatest  amount  of  hon¬ 
esty  we  experience  in  business  life,  govern  our  ac¬ 
tions.  Commodities  and  wages  have  risen  suffi¬ 
ciently  to  be  remunerative,  but  are  not  excessive. 
At  this  time  almost  everyone  in  business  can  save 
money,  if  he  is  so  disposed,  and  is  not  mentally  or 
physically  disqualified. 

There  is  a  gradual  decrease  in  the  amount  of 
mortgages  foreclosed,  and  also,  for  a  time  (until 
the  realty  market  gets  active  later  on)  of  new  mort¬ 
gages  given. 

Great  movements  begin  with  great  bank  reserves. 

— Great  movements  in  business  or  speculation  have 
their  commencement  in  large  bank  reserves,  and 
end  when  the  surplus  of  reserves  over  reserve  re¬ 
quirements  has  been  brought  down  to  a  minimum. 
These  surplus  reserves  diminish  when  good  times 
are  in  full  operation,  and  increase  as  the  times  grow 
poorer  and  less  money  is  employed  in  business  and 
speculation. 

Savings  banks  and  trust  companies  have  money  to 

loan. — The  savings  banks  and  trust  companies,  “the 


58 


HOW  TO  FORECAST 


one  the  depository  of  the  provident  poor,  the  other 
of  the  provident  rich,”  have  both  grown  in  import¬ 
ance  and  have  large  amounts  of  money  to  invest — 
the  former  in  safe  investments  regulated  by  law, 
while  the  latter  too  often  at  this  time  place  large 
sums  at  the  disposal  of  powerful  manipulators  for 
stock  promotion  or  stock  jobbing  purposes. 

Price  fluctuations  not  so  injurious  when  market  is 
scantily  supplied. — Fluctuation  in  the  price  of  com¬ 
modities  is  not  nearly  as  injurious  now  in  its  ef¬ 
fects,  when  the  market  is  scantily  supplied,  as  when 
it  has  an  overabundance  of  commodities  on  hand; 
and  failures  are  far  less  frequent  in  the  former  than 
in  the  latter  case. 

Advancing  commodity  prices. — One  of  the  best 
indications  of  the  consuming  power  of  the  people  is 
commodity  prices;  when  these  are  advancing  an 
improving  condition  of  the  public  purse  is  indicated, 
and  when  the  advance  is  very  rapid  the  presence  of 
more  or  less  speculation  is  shown. 

Stock  market  generally  barometer  of  uninvested 
capital. — The  stock  market  is  the  barometer  of  the 
supply  of  uninvested  capital  and  the  demand  for  it; 
with  the  exception,  however,  of  those  times  when 
fear  has  taken  possession  of  the  market,  or  when 
stocks  are  temporarily  a  discredited  investment. 
Stocks  are  preferred  to  real  estate  by  investors  and 
speculators  because  of  the  much  quicker  action  in 
buying  and  selling,  and  because  the  cost  of  transfer 
and  the  trouble  connected  therewith  are  so  much 
less,  only  a  few  hours  being  required,  as  against  a 
much  longer  time  for  the  selection  and  transfer  of 
real  estate;  nor  are  there  bad  titles  to  cause  long 
delays  or  endless  litigation.  If  listed  on  Wall 


BUSINESS  CONDITIONS 


59 


Street,  especially,  stocks  have  that  most  important 
feature  in  estimating  value — easy  convertibility. 

Stocks  susceptible  to  money  market. — It  takes 
cash  to  buy  stocks,  so  stocks  are  very  susceptible  to 
any  influence,  either  passing  or  permanent,  that  af¬ 
fects  the  supply  of  ready  money;  hence  the  frequent 
smaller  panics  on  Wall  Street  that  have  but  little 
influence  on  the  country  at  large. 

Stock  buying  a  popular  craze. — Stock  purchasing 
now  becomes  a  popular  craze,  and  the  printing 
presses  are  kept  busy  morning,  noon  and  night, 
striking  off  handsomely  lithographed  stocks,  many 
of  doubtful  worth,  which  are  sold  to  the  unsophisti¬ 
cated  at  prices  often  far  above  their  real  value. 

Tricks  of  manipulators. — The  unscrupulous  ma¬ 
nipulator  circulates  stories  of  many  kinds,  all  cal¬ 
culated  to  work  on  the  imagination  of  the  lamb  and 
induce  him  to  bujq  and  constantly  manipulates  prices 
so  far  as  he  is  able,  with  the  purpose  of  transfer¬ 
ring  money  from  the  pockets  of  the  innocents  to  his 
own.  He  makes  fictitious  purchases  and  sales  to 
offset  each  other,  but  which  will  appear  in  the  public 
prints  as  purchases  or  sales,  and  thus  convey  the 
idea  to  his  victim  that  there  is  great  activity  in  the 
particular  stock  or  stocks  that  he  is  for  the  time 
being  offering.  Even  securities  of  easy  virtue  at¬ 
tract  now,  and  the  desire  to  get  rich  quick  grows 
among  the  people,  as  it  always  will  if  prosperity 
lasts  long  enough. 

Speculation  runs  riot. — At  this  time,  when  the  un¬ 
used  funds  of  the  United  States  and  Europe  are  at 
the  disposal  of  Wall  Street,  it  is  natural  that  specu¬ 
lation  runs  riot,  and  there  comes  a  period  of  excess 
that  might  well  be  called  the  “merger  and  promo¬ 
tion  period,”  because  of  the  great  activity  of  pro- 


60 


HOW  TO  FORECAST 

moters.  It  is  only  after  a  long  period  of  false  hopes 
and  promises  temptingly  held  forth,  that  the  foolish 
public  finally  ask  the  professional  to  make  good; 
and  when  he  fails  to  do  so,  the  public  become  dis¬ 
couraged  and  sell,  and  condemn  good  and  bad  alike. 

Supply  of  money  becomes  exhausted,  and  public 
become  disgusted. — As  it  is  easier  to  create  new 
companies  than  it  is  new  money,  the  supply  of  the 
latter  becomes  finally  exhausted,  and  credit  as  well. 
The  public  gradually  withdraw  their  confidence  and 
purchase  fewer  stocks,  and  as  prices  shrink  their 
eyes  are  opened  (for  few  speculators  can  see  the 
error  of  their  ways  as  long  as  they  are  successful). 
Disgust  gradually  takes  the  place  of  their  old  time 
enthusiasm,  and  money  is  withdrawn  steadily  from 
Wall  Street.  But  before  this  has  taken  place  the 
manipulator,  desirous  of  exchanging  his  paper  profits 
for  hard  cash,  has  unloaded  vast  amounts  of  stocks 
upon  the  shoulders  of  unwary  lambs. 

When  bad  news  does  not  affect  prices. — When 
bad  news  does  not  affect  stock  values  adversely  but 
prices  rise  instead,  it  is  an  indication  that  stocks  are 
under  the  control  of  cliques,  and  that  they  are  rais¬ 
ing  prices  for  their  own  purposes. 

Prior  to  securities  panic,  a  decline  in  stock  values. 

— For  two  or  three  years  before  a  securities  panic 
there  is  a  gradual  decline  in  stocks,  but  this  does  not 
affect  commodity  values  to  any  great  extent,  as 
money  is  still  depreciating,  owing  to  the  larger  gold 
output  and  the  inflation  of  currency,  and  growing 
confidence  is  increasing  its  circulation.  The  general 
want  of  confidence  that  sets  in  is  directed  solely 
against  Wall  Street  and  corporate  mismanagement 
there.  Money  is  withdrawn  gradually  from  stocks, 


BUSINESS  CONDITIONS 


61 


but  there  is  plenty  to  be  had  at  normal  rates  for 
general  business  purposes. 

Merchants  now  in  safe  condition. — The  merchants 
are  in  a  healthy  financial  condition,  very  conserva¬ 
tive,  owing  but  little,  with  prices  as  yet  reasonable, 
and  therefore  in  no  condition  to  be  severely  injured 
by  a  panic.  The  few  among  them  who  do  fail  later 
on,  have  either  lost  heavily  in  stock  speculation,  or 
belong  to  that  class  who  venture  everything  on 
small  margins,  so  that  the  continuance  of  good 
times  alone  can  keep  them  afloat,  or  are  otherwise 
in  a  bad  way  for  some  special  reason. 

Great  rise  or  fall  preceded  by  long  dull  spell. — 
Any  great  rise  or  decline  in  stocks  is  generally  pre¬ 
ceded  by  a  long  continued  dull  season.  If  they  have 
unduly  risen  it  precedes  a  fall,  if  they  are  excessively 
depressed  it  goes  before  the  rise — which,  however, 
may  be  a  long  time  in  coming. 

Long  decline  shakes  out  weak  holders. — When 
stocks  have  been  going  down  for  some  time  weak 
holders  are  shaken  out.  A  short  interest  is  built  up 
and  stocks  go  into  strong  hands. 

Long  rise  develops  weakness  in  holders. — On  the 
contrary,  during  a  long  continued  rise  stocks  pass 
from  strong  hands  into  weak  ones,  pyramiding  takes 
place  and  overexpansion  of  credit  develops.  This 
weakens  the  market  and  renders  it  liable  to  suffer 
from  vigorous  attacks  of  the  bears.  The  market 
strengthens  as  stocks  decline  and  weakens  as  they 
advance,  thus  carrying  within  itself  the  natural  rem¬ 
edy  for  an  excess  in  either  direction. 

Securities  market  discounts  coming  events. — The 
securities  market,  in  its  advances  and  declines,  dis¬ 
counts  coming  events,  and  is  more  easily  affected  by 
psychological  reasons  than  is  the  merchant  or  the 


62 


HOW  TO  FORECAST 


manufacturer.  This  is  chiefly  because  the  money 
market  acts  quicker  and  more  thoroughly  on  Wall 
Street  securities,  which  are  more  mobile,  than  it 
does  on  commodities,  as  before  explained. 

Public  has  financial  gastritis. — With  the  specula¬ 
tive  public  disgusted  and  their  stock  purchasing 
power  at  an  end,  with  prices  topheavy  and  stocks 
thoroughly  watered,  financial  gastritis  sets  in, 
brought  about  by  trying  to  absorb  too  many  indi¬ 
gestible  securities. 

Minor  panic  may  occur  two  or  three  years  before 
greater  one. — Under  the  great  strain  put  upon  the 
money  market  the  weakest  point  has  to  give  way, 
and  that  is  an  inflated  stock  market.  A  selling 
movement  starts  in  and  a  minor  panic  may  take 
place  on  ’change  about  two  or  three  years  before  the 
genuine  securities  panic  arrives.  The  people  sell 
and  continue  to  sell  thereafter,  and  prices  steadily 
fall. 

Professionals  unable  to  support  market. — Manip¬ 
ulators  and  professionals  at  this  time  buy  to  protect 
their  other  holdings,  and  a  little  later  because  they 
think  stocks  are  a  good  purchase;  but  finally  the 
volume  of  sales  is  so  great  and  continuous  and 
prices  fall  so  abominably,  that  the  professional 
eventually  reaches  the  limit  of  his  capacity  to  buy, 
having  exhausted  his  credit  here  and  abroad.  With 
insufficient  buyers  and  liberal  offers  of  stock  at 
falling  prices,  and  a  stringent  money  market  in  Wall 
Street,  the  crash  finally  takes  place  and  the  Finan¬ 
cial  Panic  is  on. 

Resume  of  events. — A  brief  resume  of  the  happen¬ 
ings  is  as  follows:  Speculators  start  the  buying, 
bankers  encourage  it,  the  public  later  begins  to  get 
excited  at  the  sight  of  sudden  wealth  easily  acquired 


BUSINESS  CONDITIONS 


08 


and  buys  right  and  left  at  high  prices.  Speculators 
thereupon  nurse  and  stimulate  the  excitement  by 
reports  of  what  is  to  happen  next;  prices  rise  to  a 
point  where  they  can  go  no  higher,  and  the  public 
becomes  impatient  and  frightened.  The  banks’  re¬ 
sources  are  exhausted,  and  excessively  high  money 
rates  coincide  with  unmistakable  signs  that  insiders 
are  selling  out  to  the  public  and  realizing  their 
paper  profits.  With  stock  prices  so  high  as  to  yield 
but  scant  interest,  and  with  no  more  money  in  sight 
to  draw  upon  for  purposes  of  stock  speculation, 
overstrained  confidence  is  shattered,  and  everyone 
tries  to  sell  and  no  one  to  buy.  Rotten  disclosures 
are  now  due  to  come  to  the  surface  and  the  crash 
follows. 


VII. — After  Securities  Panic  to  Excessive 

Prosperity 

About  io  to  12  Years  after  Commercial  Panic. 

[Note — These  conditions  last  occurred  1903-1905.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example ,  they  may  he  expected  to  repeat  themselves 
about  1923-1925.] 

FEW  business  men  foresee  the  panic. — Com¬ 
paratively  few  have  foreseen  the  panic,  as 
business  conditions  remain  so  good  and  busi¬ 
ness  men  in  general  are  so  immersed  in  their 
own  affairs  that  they  do  not  watch  the  operations 
of  the  Stock  Exchange  closely;  nor  do  they  bother 
with  what  apparently  does  not  concern  them. 

Panic  affects  speculators  worst,  and  business  only 
to  a  small  extent.—It  is  confined  in  a  great  degree 
to  the  speculative  element,  and  to  banks  doing  a 
Wall  Street  business.  The  business  interests  of  the 
country  at  this  time  occupy  the  position  of  creditor 
and  owe  little  or  nothing;  whereas  Wall  Street, 
being  the  home  of  stocks  and  bonds,  is  a  heavy 
debtor,  owing  every  source  it  can  borrow  from  at 
home  and  abroad,  and  never  ceasing  to  borrow 
until  its  credit  is  exhausted  and  the  crash  comes, 


BUSINESS  CONDITIONS 


G5 


when  payment  is  demanded.  For  this  reason  the 
effects  of  the  panic  are  mostly  confined  to  Wall 
Street,  and  while  affecting  business  for  a  year  there¬ 
after  through  the  money  market,  most  of  the  effect 
is  of  a  sympathetic  nature  and  affects  the  sale  of 
luxuries  more  than  anything  else.  The  panic  is  a 
rich  man’s  affair,  the  public  having  mostly  sold  out 
to  the  rich  speculator,  as  we  have  seen.  The  cause 
is  not  serious  enough  to  affect  labor  to  any  marked 
degree,  and  consequently  has  but  small  influence  on 
the  prices  of  the  necessaries  of  life. 

Panic  makes  labor  reasonable. — It,  however,  has 
one  very  beneficial  effect  on  labor.  Labor  has  been 
so  fully  employed,  and  at  so  much  higher  wages, 
that  its  demands  (as  in  1902)  have  become  very  un¬ 
reasonable;  continued  success  and  compliance  with 
its  wishes  have,  as  is  usual  with  human  nature,  been 
too  much  for  it,  and  the  lesson  administered  after  a 
security  panic  brings  its  demands  back  to  a  more 
reasonable  basis. 

A  credit  panic. — The  Securities  or  Financial  Panic 
is  a  credit  crisis  and  is  not  accompanied  outside  of 
Wall  Street  by  money  stringency  due  to  exhaustion 
of  credit  and  over-action  of  money  in  all  lines  and 
conversion  of  liquid  capital  into  fixed  value,  as  is 
the  case  in  a  commercial  panic.  This  is  shown  by 
the  low  rate  of  interest  paid  by  merchants,  even 
during  the  panic. 

Securities  and  commercial  panic  compared. — The 

securities  panic  is  the  result  of  overproduction  and 
speculation  in  stocks  and  stocks  only,  whereas  the 
commercial  panic  is  preceded  by  an  inflation  of  stock 
prices  and  of  all  industrial  and  commercial  values 
and  by  great  indebtedness,  and  followed  by  a  great 
fall  in  prices  of  commodities  and  real  estate,  as  well 


66 


HOW  TO  FORECAST 


as  of  stocks.  Both  panics  are  preceded  by  extrava¬ 
gance  and  the  prices  reached  and  indebtedness  in¬ 
curred  strain  credit;  but  in  the  former  case  credit  is 
withdrawn  from  stocks  only,  in  the  latter  a  with¬ 
drawal  of  money  and  credit  from  stocks,  business 
and  speculation  occurs. 

When  iron  and  steel  fall.— -Iron  and  steel  prices, 
generally  recognized  as  a  barometer  of  trade,  be¬ 
have  differently  in  the  two  kinds  of  panics.  When 
a  securities  panic  is  impending  they  do  not  fall  until 
just  before  or  just  after  the  panic,  as  this  panic  is 
confined  mainly  to  securities  and  business  lines  are 
but  slightly  affected.  In  a  general  commercial  panic, 
on  the  other  hand,  iron  and  steel  begin  to  fall  at  an 
early  stage  of  the  decline  in  general  prices. 

Money  leaves  Wall  Street  and  goes  into  busi¬ 
ness.— -The  money  of  the  country  is  now  diverted 
from  Wall  Street  speculation  and  placed*-  once  more 
in  general  lines  in  which  the  owner  has  confidence. 
The  public  have  lost  faith  in  Wall  Street,  have  de¬ 
manded  an  accounting,  and  are  transferring  their 
business  elsewhere,  thoroughly  displeased  with  stock 
speculation.  This  transference  is  indicated  at  the 
time  by  increasing  loans  in  business  lines,  while 
great  liquidation  is  going  on  in  stocks.  After  the 
panic,  however,  there  is  a  disinclination  for  a  time 
to  undertake  new  operations  which  will  tie  up  capi¬ 
tal  and  change  it  into  fixed  values,  until  the  capitalist 
can  quietly  investigate  the  situation  and  become 
positive  as  to  how  far  the  damage  will  extend,  but 
this  is  only  a  short  halt. 

Losses  to  banks  not  near  as  heavy  as  after  com¬ 
mercial  panic. — The  Wall  Street  obligations  do  not 
entail  nearly  as  heavy  losses  on  banks  as  do  the 
heavy  borrowings  of  all  classes  prior  to  a  commer- 


BUSINESS  CONDITIONS 


67 


cial  panic;  for  the  former  are,  of  late  years,  gener¬ 
ally  well  secured  on  stock  collateral,  and  the  banker 
has  learned  from  experience  to  sell  out  this  collat¬ 
eral  in  time  to  secure  himself. 

West  suffers  less  than  East. — The  West  being  the 
home  of  the  natural  product  and  having  indulged  in 
very  little  stock  speculation,  suffers  much  less  than 
the  East,  especially  New  York  City,  which  is  the 
center  of  stock  transactions.  The  damage  to  the 
West  is  mainly  in  the  temporary  slowing  up  of 
business  during  the  continuance  of  fear  and  the 
liquidation  that  results;  but  the  East,  being  the 
financial  center,  is  most  affected  by  a  panic  that  is 
mainly  financial. 

Rich  mostly  affected. — The  few  failures,  the  com¬ 
paratively  quick  improvement  in  stock  prices,  the 
fact  that  business  is  so  little  injured  and  that  earn¬ 
ings  of  railroads  during  and  after  a  securities  panic 
are  but  little  affected,  show  that  the  wealthy  bear 
most  of  the  losses.  There  were  no  intrinsic  defects 
in  most  of  the  securities  which  suffered,  but  exces¬ 
sive  stock  speculation,  inflating  values  wildly  and 
tying  up  a  large  amount  of  liquid  capital  needed  in 
other  lines,  resulted  in  temporary  congestion  of  the 
money  market. 

Recovery  quick. — The  recovery  is  far  quicker  than 
after  a  commercial  panic,  a  year  being  about  the  ex¬ 
tent  of  it,  for  stocks  are  in  themselves  semi-liquid 
and  therefore  the  liquidation  is  much  easier  effected 
than  when  it  has  to  permeate  all  lines  of  business, 
ending  up  in  real  estate. 

Outside  of  Wall  Street  people  have  been  saving 
money. — While  many  have  speculated,  yet  the  per¬ 
centage  is  comparatively  small  when  spread  all 
through  the  country.  Many  of  the  public  deserted 


68 


HOW  TO  FORECAST 


the  market  at  an  early  date,  when  it  lost  the  attrac¬ 
tion  of  constantly  increasing  values.  Most  people 
have  beeen  employed  and  have  saved  money,  and 
the  railroads  and  farmers  are  doing  well.  Wall 
Street  is  the  one  spot  financially  diseased. 

Public  slow  to  return  to  Wall  Street. — When  the 
public  desert  stocks  and  go  into  other  lines  of  in¬ 
vestment  or  business,  as  they  do  after  a  securities 
panic,  it  is  a  long  time  before  they  wander  back, 
and  in  the  meantime  prices  have  to  react.  The  pub¬ 
lic  must  believe  that  the  investment  is  a  tempting 
one  before  they  return — not  that  they  ever  pur¬ 
chase  in  large  amounts  at  the  lowest  figures,  for 
they  do  not;  rising  prices  and  the  hope  of  their 
going  up  still  further  are  always  the  temptation  that 
induces  renewed  speculative  buying.  It  is  only  the 
regular  investors  who  are  wise  enough  to  recognize 
bargains  and  buy  them. 

Bank  customers  have  to  pay  up  for  stocks. — For 
months  after  the  securities  panic  bank  clients  have 
to  redeem  from  the  banks  inferior  securities  given 
as  collateral,  that  the  public  would  not  take,  and 
are  obliged  to  sacrifice  good  ones  to  do  so.  In  1903, 
in  order  to  do  this  immense  borrowings  and  credits 
had  to  be  obtained  abroad,  and  these  extended  to  a 
point  that  led  to  just  criticism  of  our  credits  and 
methods. 

European  crops. — At  the  time  of  our  financial 
panic  if  Europe  has  had  poor  crops  the  effects  of 
the  panic  are  apt  to  be  more  severe,  as  it  closes 
much  of  that  market  to  our  bargain  sales.  We  can¬ 
not  under  these  circumstances  sell  Europe  both 
crops  and  stocks,  and  as  a  result  the  latter  have  to 
suffer. 

Some  effects  of  securities  panic. — The  securities 


r~~f'  • 


BUSINESS  CONDITIONS 


69 


crisis  cuts  down  profits  and  reduces  the  volume  of 
business,  and  for  a  very  short  time  a  few  hands  are 
discharged  from  shops  and  factories.  It  is,  how¬ 
ever,  the  sale  of  pictures,  the  receipts  of  swell  res¬ 
taurants,  etc.,  that  feel  its  worst  effects,  and  most 
of  this  in  New  York  City.  Wall  Street  and  Fifth 
Avenue  suffer  most. 

Origin  of  losses. — Much  of  the  loss  that  is  sus¬ 
tained  in  a  securities  panic  comes  from  downright 
rascality  in  formation  of  some  new  companies  and 
watering  of  the  old,  the  misleading  information  put 
forth,  and  the  excessive  booming  of  stocks  through 
rank  manipulation.  The  remainder  the  public  must 
lay  to  the  gambling  spirit  that  possesses  them. 

Shrinkage  in  bank  clearings. — It  is  well  to  re¬ 
member  that  the  shrinkage  in  bank  clearings  is 
mostly  confined  to  the  East,  especially  New  York 
City,  and  that  the  loss,  if  analyzed,  is  in  a  measure 
due  to  the  elimination  of  past  speculative  purchases, 
and  sales  of  stocks  at  lower  figures.  However,  quite 
a  percentage  of  previous  sales  of  stocks  at  higher 
prices  have  been  on  “matched  orders,”  and  the  let¬ 
ting  of  the  wind  out  of  these  bubbles  is  really  a 
benefit  to  the  community.  Commodity  sales  are  lar¬ 
ger  than  thought,  as  prices  are  still  low,  so  that  such 
sales  do  not  show  up  in  the  volume  of  clearings  for 
as  much  as  they  are  really  entitled  to.  The  quiet 
improvement  that  sets  in  later  on  in  business  cir¬ 
cles  is  not  noticed  as  soon  as  it  should  be,  owing 
to  the  fact  that  it  is  overshadowed  in  the  East  by 
the  great  shrinkage  in  stock  sales. 

European  loans  after  panic. — After  the  panic,  for 
as  long  a  period  as  fear  is  a  prominent  feature,  few 
great  railroad  or  other  loans  can  be  negotiated  here 
and  applications  of  this  nature  have  to  be  taken  to 


70 


HOW  TO  FORECAST 


Europe,  and  unless  they  are  very  good  and  the  price 
reduced  considerably  so  as  to  tempt  buyers,  they 
will  not  be  accepted.  In  Europe  there  is  a  large 
investing  class  who  have  money  and  are  not  in¬ 
volved  to  any  great  extent  and  these  become  pur¬ 
chasers. 

Incorporations.— As  the  times  improve  in  business 
lines  there  are  numerous  incorporations,  mostly  at 
first  for  manufacturing  purposes  that  supply  the  in¬ 
creasing  demand  for  commodities,  next  for  building 
and  real  estate  purposes  in  the  large  cities,  and  later 
on  for  speculation  in  these  lines. 

Mostly  speculators  who  get  benefit  of  stock  rise. — 
The  public  are  now  so  interested  in  other  affairs 
and  their  experience  with  stocks  has  been  so  recent 
and  disastrous,  that  they  have  not  again  acquired  a 
fancy  for  stock  speculation;  so  that  when  times  im¬ 
prove  sufficiently  to  warrant  an  advance  in  stocks, 
it  is  mostly  the  professional  and  investing  class 
who  reap  the  harvest,  and  not  so  much  the  specula¬ 
tive  public  in  general  as  was  the  case  before.  Pro¬ 
fessionals,  as  usual,  borrow  money  in  every  direc¬ 
tion,  and  Europe  and  the  West  contribute  largely, 
attracted  by  the  high  rates  of  interest  that  finally 
prevail  on  Wall  Street. 

Staple  investments. — Many  of  the  public  are  now 
in  favor  of  more  staple  investments  than  stocks, 
something  that  the  purchaser  can  control  himself, 
so  they  invest  their  money  in  factories,  warehouses, 
home  building,  realty  and  business,  and  much  t>f  this 
capital  ceases  to  be  circulating. 

Mining  stock  craze  on.— Others  are  smitten  with 
a  craze  (for  such  it  eventually  amounts  to)  to  in¬ 
vest  in  mining  stocks,  which  spring  up  as  it  were 
from  under  a  magician’s  wand  to  tap  the  hidden 


BUSINESS  CONDITIONS 


71 


sources  of  wealth.  The  tools  used  often  seem  to 
be  the  printing  press,  the  post  offce,  and  a  few  acres 
of  land  thrown  in — rock,  if  possible,  and  preferably 
inaccessible  or  near  some  good  mine,  providing  it 
can  be  bought  for  a  song.  Often  a  hole  scooped 
out  of  the  ground  a  few  feet  deep,  is  all  that  is  nec¬ 
essary,  so  that  the  owners  can  expatiate  learnedly 
about  “development  work,”  for  the  purchaser  never 
cares  to  inspect  it.  It  is  also  well  to  be  a  little 
lavish  in  issuing  a  fine  stock  certificate,  one  that  will 
appeal  to  the  purchaser’s  imagination,  and  with  a 
fluent  talker  at  the  office  one  is  ready  for  business. 
This  movement,  like  others  of  its  kind,  originally 
started  with  solid  merit  as  a  foundation.  Those 
whose  business  it  is  have  for  some  time  past  been 
hard  at  work  developing  mines  and  putting  them  on 
a  paying  basis. 

In  boom  times  ordinary  rules  of  common  sense 
do  not  govern. — We  must  remember  that  in  boom 
tims  a  psychological  influence  is  exerted,  exercising 
as  it  were  an  intoxicating  effect,  the  natural  out¬ 
growth  of  long  continued  success,  and  that  at  this 
time  the  ordinary  standards  of  common  sense  do  not 
govern  and  dreams  appear  to  many  as  actualities. 

Clerks  and  artisans  have  saved  money.- — All 
through  the  hard  times  there  has  been  a  large  class 
of  clerks  and  artisans  who,  having  had  steady  work 
at  fair  wages,  have  been  able  because  of  the  low 
prices  to  save  up  money.  Many  of  them  have  lived 
in  cramped  quarters  and  disagreeable  neighbor¬ 
hoods,  and  long  for  a  detached  home,  with  fresh 
air  and  better  social  surroundings,  to  bring  up  a 
family  in.  Rents  have  risen  as  vacant  houses  grow 
scarcer,  and  competition  sets  in,  until  finally  it  is 
cheaper  to  build,  because  of  the  reasonable  price  of 


72 


HOW  TO  FORECAST 


lots  and  building  materials,  than  it  is  to  pay  rent. 
It  is  this  class,  and  not  the  rich,  that  now  start  a 
building  movement — at  first  mostly  towards  the  out¬ 
skirts,  where  they  can  better  afford  to  live. 

When  houses  pay. — As  a  well-known  writer  says, 
“If  the  rents  of  houses  pay  better  than  money  at  in¬ 
terest,  houses  will  advance  rapidly  in  selling  value, 
and  the  owner  of  capital  at  interest  will  call  it  in, 
hire  men,  buy  material  and  build  houses,  until  the 
old  equilibrium  between  capital  in  houses  and  capi¬ 
tal  at  interest  is  restored.” 

Investment  movement  in  realty. — For  a  long  time 
(three  to  five  years)  this  is  an  investment  movement 
only.  The  buying  of  vacant  tracts  for  subdivision, 
and  by  the  builder  who  intends  to  build  thereon, 
is  at  this  period  entirely  legitimate,  as  they  are 
intended  to  supply  a  want — not  merely  to  pass  from 
hand  to  hand  at  higher  and  higher  prices  in  a  con¬ 
tinuous  gamble.  The  proof  that  the  movement  is 
not  at  first  speculative  is  disclosed  by  the  fact  that 
lots  not  needed  for  building  purposes  are  neglected 
and  as  unsalable  as  ever,  while  those  that  have 
this  value  attached  to  them  gradually  rise  in  price. 
This  rise  is  normal,  and  finally  makes  a  good 
many  friendly  toward  real  estate  who  have  hitherto 
preferred  stocks.  This  realty  movement  may  start 
in  about  a  year  before  the  securities  panic  in  those 
cities  that  have  received  the  greatest  increase  in 
population,  like  New  York  City,  Seattle  or  Los  An¬ 
geles  in  recent  years.  In  other  cities  it  does  not 
start  until  nearly  a  year  after  the  panic. 


VIII. — Excessive  Prosperity  to  Waning 

of  Stock  Boom 

About  12  to  13  Years  after  Commercial  Panic. 

[Note — These  conditions  last  occurred  1905-1906.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example,  they  may  be  expected  to  repeat  themselves 
about  1925-1926.] 

MONEY  and  confidence  beget  rise  in  prices. 

— The  history  of  economics  has  always 
shown  that  an  abundance  of  cheap  money 
and  long  time  credits,  with  confidence  (the 
presence  of  which  is  now  shown  by  the  feverish  pace 
of  enterprise)  and  rising  prices,  especially  if  aug¬ 
mented  by  a  great  increase  in  gold  output,  sooner 
or  later  develop  inflation  and  speculation.  People 
are  tempted  to  go  heavily  in  debt.  The  use  of  this 
credit  increases  the  demand  for  commodities,  caus¬ 
ing  them  to  circulate  rapidly  by  reason  of  their 
ready  sale.  That  is  necessary  before  they  can 
boom.  All  this  enhances  prices  and  results  in  a 
greater  demand  for  money  and  a  consequent  rise  in 
interest  rates.  This  movement  spreads  through  all 
forms  of  fixed  capital,  and  when  sufficiently  inter- 


74 


HOW  TO  FORECAST 


esting  is  taken  up  by  the  speculator  and  continued 
to  exhaustion. 

Many  new  companies  organized. — Company  pro¬ 
motion  booms  follow  the  tide  of  prosperity.  The 
great  amount  of  money  and  credit  in  circulation 
begets  the  desire  to  utilize  them.  The  best  and 
quickest  way  to  do  so  is  through  company  organi¬ 
zation. 

A  period  of  excess. — We  are  now  entering  upon 
an  era  of  excessive  development,  internal  improve¬ 
ments  and  railroad  building,  of  overproduction  and 
overaction  in  all  lines,  commencing  with  stocks  and 
ending  up  in  real  estate — a  period  when  prices  are 
raised  to  an  extreme  so  great  that  the  public  finally 
becomes  rebellious. 

Many  not  now  interested  in  stocks.— Only  a  part 
of  the  speculative  public  is  interested  in  stocks  after 
the  financial  panic.  The  main  enhancement  in 
prices  at  that  time  is  the  work  of  the  rich  cliques 
and  manipulators,  supported  by  a  steady  invest¬ 
ment  buying.  This  is  shown  by  the  fact  that  after 
the  great  fall  in  the  stock  market  when  business  gets 
the  upper  hand  (as  in  March,  1907)  there  are  com¬ 
paratively  few  failures  in  the  business  world.  That 
the  manipulators  and  capitalists  interested  in  the 
stock  market  are  rich,  is  shown  by  their  ability  to 
put  up  additional  collateral  on  a  rapidly  falling 
market,  and  eventually  to  stand  the  very  severe 
losses  entailed  by  the  crash,  without  failing  them¬ 
selves  and  bringing  down  others  with  them. 

Choice  bonds  languish. — Choice  bonds,  with  their 
small  fixed  interest  rates,  begin  to  languish,  and 
more  doubtful  issues  yielding  a  larger  income 
are  for  a  time  in  favor;  but  a  further  rise 
in  interest  rates  finally  makes  even  these  second 


BUSINESS  CONDITIONS 


75 


class  bonds  unsalable.  This  tendency  of  bonds  to 
fall  indicates  that  interest  rates  are  advancing  and 
are  now  too  high  to  allow  bonds  to  compete,  hence 
bonds  fall  in  price  in  a  further  endeavor  to  hold 
their  place  in  the  money  market.  This  drives  many 
investors  into  speculative  stock  issues  or  other  in¬ 
vestments  that  are  perhaps  not  conservative  or  even 
safe.  It  also  indicates  that  both  increasing  business 
and  speculation  are  making  greater  demands  on  the 
money  market. 

Commodity  prices  rise. — Commodity  prices  also 
rise  with  interest  rates,  and  so  increase  the  demand 
for  money  and  credit.  The  greatest  rise  in  com¬ 
modity  prices  in  boom  times  is  in  primary  commodi¬ 
ties — those  needed  by  manufacturers.  These  in¬ 
creases  in  prices  stimulate  mercantile  classes  to 
greater  activity  and  larger  purchases,  and  the  banks 
are  spurred  on  to  increase  their  lines  of  credit. 

Money  begins  to  go  from  stocks  into  business.— 
As  their  business  grows,  many  business  men  with¬ 
draw  their  capital  from  Wall  Street  and  devote  their 
time  and  money  to  their  own  enterprises;  and  the 
first  serious  setback  to  the  rapid  rise  in  prices  causes 
many  to  desert  the  Street  and  leave  the  field  there¬ 
after  to  the  manipulator  and  simon-pure  investor. 

Investors  become  speculators. — When  stocks 
yield  but  small  returns  on  the  selling  price  and  in¬ 
terest  rates  are  high,  the  main  inducement  to  buy 
stocks  is  the  hope  of  a  rise.  The  buyer  now  be¬ 
comes  a  speculator,  not  an  investor. 

Your  genuine  investor,  if  wise  (but  many  hold  on) 
then  sells  his  stocks,  places  his  money  elsewhere, 
and  leaves  the  market  to  the  professionals  and 
cliques  to  fight  it  out  as  they  see  fit.  Battles  royal 
often  take  place  between  these  great  warring  inter- 


76  HOW  TO  FORECAST  r~^ 

ests,  in  which  the  small  speculator  may  be  gathered 
up  incidentally  by  either  party  and  landed  on  some 
side  street,  as  it  were,  shorn  of  his  cash  and  possibly 
conscious  of  the  foolish  part  he  has  been  acting. 

Stock  market  passes  to  a  speculative  basis. — The 
stock  market  has  now  passed  from  an  investment 
to  a  speculative  basis,  as  is  evidenced  by  the  fact 
that  dividend  yields  on  stocks  are  considerably 
below  commercial  rates  of  interest.  At  this  time 
rumors  are  much  used  to  enhance  or  maintain  prices, 
and  this  helps  to  mark  the  change. 

We  become  world’s  creditors. — In  February,  1905, 
we  ceased  temporarily  to  feed  the  world  with  food, 
but  gave  it  gold  instead,  paying  up  our  foreign  debts 
and  loaning  foreigners,  for  the  first  time,  part  of 
our  surplus  gold.  We  thus  made  our  initial  entry 
into  the  list  of  creditor  nations.  We  are  not  a  very 
important  factor  in  the  list  as  yet,  but  are  likely  to 
increase  greatly  in  the  future  along  these  lines.  Our 
wealth  is  rapidly  increasing  because,  owing  to  ma¬ 
chinery  and  better  methods,  one  man’s  work  now 
produces  several  times  as  much  as  it  did  in  1850, 
and  from  what  was  formerly  wasted,  fortunes  are 
being  made. 

High  rate  of  exchange. — A  high  or  rising  rate  of 
exchange  at  this  time  often  indicates  an  increase  of 
indebtedness,  or  it  may  mean  that  our  exports  are 
light. 

What  continued  prosperity  brings. — Long  con¬ 
tinued  prosperity  brings  inflation  of  prices  and 
credit  and  consolidation  of  great  interests,  unprece¬ 
dented  construction,  high  priced  labor  and  generous 
living.  Extravagance  is  greatly  increased  by  easy 
credit  and  successful  speculation.  When  the  people 


BUSINESS  CONDITIONS 


77 


have  money  it  is  human  nature  to  spend  it  and  even 
to  run  into  debt. 

Failures  decrease. — At  these  times,  when  prices 
are  rapidly  augmenting  and  sales  are  easy,  there  are 
fewer  failures,  for  the  debtor  can  quickly  dispose  of 
his  properties  at  constantly  increasing  prices,  and 
this,  together  with  the  ease  with  which  credits  can 
be  obtained,  permits  him  to  pay  up  and  acquire  new 
indebtedness — to  swap  it,  as  it  were,  and  so  keep 
his  credit  good  for  the  time  being. 

Sales  of  our  bonds  and  stocks  in  Europe  diminish. 
— Also  improved  times  in  Europe  now  raise  interest 
rates  there  and  so  lessen  the  foreign  demand  for  our 
stocks  and  bonds;  especially  the  latter,  because  of 
their  small  interest  and  their  non-participating  char¬ 
acter. 

New  gold  fields. — The  large  amount  of  money  and 
credit  now  available,  together  with  improved  labor- 
saving  devices  and  new  chemical  and  engineering 
methods,  make  it  easy  to  get  money  to  explore  new 
gold  and  copper  fields,  and  the  great  amount  of  gold 
obtained  adds  to  prices  and  speculation. 

The  effect  of  this  increased  gold  output  is  more 
noticeable  :'n  those  countries  where  the  credit  sys¬ 
tem  is  well  developed  by  means  of  banks,  than  it  is 
in  other  countries  where  exchanges  of  commodities 
are  chiefly  effected  by  the  circulation  of  money 
from  hand  to  hand;  as  the  banker  uses  the  new 
gold  as  a  basis  of  credit  expansion,  forming  a  sort 
of  additional  credit  circulation.  Increased  rapidity 
of  circulation  has  the  effect,  as  we  have  seen,  of  a 
greater  supply. 

Public  think  prosperity  will  last. — At  this  period, 
when  most  events  are  favorable,  the  impression  per¬ 
meates  the  masses  that  these  conditions  are  to  con- 


78 


HOW  TO  FORECAST 


tinue  indefinitely,  that  supplies  are  short  and  the 
demand  great,  and  this  acts  as  a  stimulus  to  advance 
prices  still  further. 

Realty  becomes  a  competitor  with  savings  banks. 

— Real  estate  operations  are  now  making  large  de¬ 
mands  on  the  money  market,  and  become  a  com¬ 
petitor  with  the  savings  banks  for  the  earnings  of 
the  people.  This  affects  bank  balances  greatly  for 
several  years. 

People  demand  better  transit. — Now  springs  up  a 
demand  for  better  transit  facilities  in  the  over¬ 
crowded  cities,  due  not  only  to  the  increase  in  popu¬ 
lation,  but  to  the  sale  of  lots  in  the  outskirts  to  the 
poorer  classes  for  homes.  People  living  in  these 
districts,  as  their  numbers  increase,  demand  better 
transit  facilities  to  and  from  their  business.  Later 
on  this  real  estate  movement  broadens  out  into 
speculation,  and  the  demand  then  becomes  more 
insistent  than  ever. 

Famine  of  small  currency  indicates  more  active 
trade.— -A  currency  famine  setting  in  with  a  scarcity 
of  small  bills  is  a  sure  sign  of  active  trade,  indicat¬ 
ing  as  it  does  that  people  are  carrying  more  money 
about  their  persons  and  consequently  spending 
more,  and  that  the  small  trader  is  keeping  more  on 
hand  in  his  till  for  business  purposes. 

Increase  in  circulation  begets  excessive  loans. — A 
steady  and  large  increase  in  circulation  makes  it 
easier  for  the  banks  to  grant  excessive  loans  and 
discounts,  and  so  overstimulates  business.  The  very 
ease  with  which  debts  can  be  incurred  in  good  times 
proves  often  an  irresistible  inducement  to  many  to 
assume  obligations  which  later  on  they  cannot  meet. 

When  business  is  good  merchants  do  not  worry. 
— When  merchants  have  more  than  they  can  attend 


BUSINESS  CONDITIONS 


79 


to  (as  In  1906)  they  are  so  pre-occupied  in  business 
lines  that  there  is  a  disposition  to  let  the  future  take 
care  of  itself  when  any  disturbing  features  arise, 
and  to  trust  to  the  good  sense  of  the  people;  so  they 
do  not  worry  as  much  as  they  do  in  poorer  times 
over  threatened  legislation  or  the  disastrous  losses 
arising  from  great  fires,  earthquakes  and  the  like. 

Modern  business  puts  small  concerns  at  a  disad¬ 
vantage. — Our  modern  methods  of  doing  business 
on  as  small  a  margin  of  profit  as  possible,  and  the 
great  cost  of  modern  machinery,  have  made  it  nec¬ 
essary,  in  many  lines,  to  have  a  very  large  capital 
at  one’s  disposal  in  order  to  do  business  on  the  most 
economical  basis.  This  places  individual  firms  at  a 
great  disadvantage,  and  they  have  to  give  way  to 
large  corporations  with  greater  capital  and  influ¬ 
ence.  Individual  ownership  and  old  business  meth¬ 
ods  are  fast  becoming  a  thing  of  the  past,  and  this 
tendency  will  continue  to  grow  as  the  supply  of 
capital  increases.  As  one  writer  aptly  puts  it,  “econ¬ 
omic  evolution  is  making  for  the  triumph  of  the 
strong  combination  over  the  weak  individual.” 

Corporate  management  as  honest  as  private.— 
Notwithstanding  all  that  has  been  said  to  the  con¬ 
trary,  we  shall  probably  find  as  much  honesty  under 
corporate  management  as  under  private  control,  and 
in  time  the  former,  being  more  subject  to  public 
inspection  and  legislative  action,  will  become  the 
favorite  of  the  two,  especially  as  corporations  are 
less  likely  to  fail;  but  perhaps  it  will  have  to  be 
eventually  on  a  cooperative  basis,  where  all  em¬ 
ployees  participate  in  the  profits. 

Commercial  banks  should  not  pay  interest.— The 
bad  habit  of  banks  (other  than  savings)  offering  in¬ 
terest,  compels  the  banks  to  seek  a  high  rate  of  in- 


80 


HOW  TO  FORECAST 


? 


terest  in  order  to  recoup  themselves  for  the  interest 
they  are  paying.  Oftentimes  the  rate  the  bank  must 
earn  is  so  high  that  only  the  speculative  mind  can 
see  any  profit  (real  or  imagined)  in  borrowing  at 
such  rates.  This  attracts  an  undesirable  class  of 
loans,  and  so  sows  the  seeds  of  future  trouble  for 
the  bank.  Also,  such  banks  are  not  safeguarded  by 
the  same  laws  as  savings  banks,  and  hence  are  not 
as  safe  a  depository. 

Small  reactions  good. — From  time  to  time  in  the 
upward  movement  small  reactions  occur.  These 
are  remedial  and  corrective  and  indicate  that  the  up¬ 
ward  swing  is  becoming  too  rapid  and  dangerous 
and  that  a  slowing  down  is  temporarily  advisable. 

Speculation  active. — Fascinated  by  the  rapid  rise 
in  prices,  as  one  writer  says,  many  now  join  in  the 
speculative  movement  and  ride  gaily  to  a  cropper, 
and  bankers  and  brokers  are  too  often  found  encour¬ 
aging  a  speculation  that  brings  them  business.  Easy 
credit  and  plenty  of  money  are  ever  great  factors 
in  creating  speculation.  Many  companies  have  at 
this  time  such  a  large  amount  of  surplus  profits  that 
it  becomes  fairly  burdensome,  and  it  is  natural  that 
these  funds  should  be  easily  diverted  to  specula¬ 
tion.  The  professional  manipulator  encourages  and 
stimulates  the  excitement  by  reports  of  what  is  to 
happen  next,  and  plays  upon  the  hopes  or  fears  of 
the  public  as  a  musician  would  on  an  instrument. 
An  intense  ambition  to  acquire  money  now  leads 
frequently  to  an  abuse  of  credit. 

Most  attractive  ventures  taken  up  first. — The  spec¬ 
ulator  selects  the  ventures  which  are  most  attrac¬ 
tive,  promising  the  greatest  returns,  and  these  are 
taken  up  in  the  regular  order  of  their  financial  at¬ 
tractiveness,  real  estate  being  last. 


BUSINESS  CONDITIONS 


81 


It  is  action  that  your  true  speculator  desires,  a 
chance  to  guess,  and  hope  and  conceit  delude  him 
with  the  idea  that  he  will  come  out  a  winner.  As 
Thomas  Gibson  says,  “Speculation  in  moderation, 
connected  with  natural  fluctuation  in  values  based 
on  the  law  of  supply  and  demand,  is  wholesome  and 
legitimate,  but  is  bad  if  connected  with  artificial 
fluctuations;  the  latter  is  simply  a  gambling  em¬ 
ployment  of  capital,  bad  for  legitimate  business  and 
for  those  engaged  in  speculation  as  well.  This  ficti¬ 
tious  species  of  speculation,  bearing  within  itself 
no  means  of  improving,  on  the  average,  the  means 
of  those  engaged  in  it,  must  clearly  result,  in  the 
long  run,  unsatisfactorily  to  the  speculator.  It  is 
a  guess  at  what  is  going  to  be.  The  fascination  of 
hope  keeps  the  speculator  in  the  field  till  his  Iasi 
dollar  is  spent.  In  this  way  speculation  fixes  its 
own  limits  and  naturally  wears  itself  out.” 

Mr.  Gibson,  in  “Pitfalls  of  Speculation,”  taking 
4,000  speculative  accounts  in  stocks  and  cereals,  ex¬ 
tending  over  a  period  of  ten  years,  finds  that  80  per 
cent,  showed  a  final  loss,  that  the  tendency  to  buy 
at  the  top  and  sell  at  the  bottom  was  most  prevalent, 
and  that  most  of  the  operations  appeared  to  be  of  a 
purely  gambling  nature.  The  further  fact  was  es¬ 
tablished  that  they  universally  led  to  excesses.  He 
says:  “Speculation  feeds  upon  wide  and  frequent 
fluctuations  and  wanes  as  values  become  steadier, 
whereas  unsteadiness  interferes  with  the  employ¬ 
ment  of  capital  in  legitimate  business.” 

One  line  may  absorb  too  much  money. — At  this 
time  and  thereafter,  one  source  of  investment,  as 
stocks,  real  estate,  etc.,  may  absorb  an  undue 
amount  of  money,  thereby  not  only  crippling  other 
lines  for  awhile  because  cash  and  credit  are  with- 


82 


HOW  TO  FORECAST 


held  from  them,  but  even  becoming  dangerous  as  a 
result  of  excessive  capital  being  drawn  into  the  one 
channel. 

City  attracts  country  men. — The  movement 
toward  the  cities  that  now  takes  places  is  in  search 
of  the  greatest  opportunities  and  attractions.  The 
cities  offer  superior  opportunities  to  labor,  greater 
social  advantages,  and  wider  range  of  entertainment. 
Their  attractive  power  is  therefore  very  great,  and 
ultimately  a  surplus  of  labor  in  the  great  cities  re¬ 
sults.  Later,  when  times  become  stringent,  the  tide 
of  population  ebbs  back  to  the  country  again.  The 
subtraction  of  population  from  the  country,  while 
in  many  ways  a  great  inconvenience,  yet  benefits 
the  farmer,  as  it  adds  to  consumers  and  subtracts 
from  agricultural  producers,  and  so  tends  to  raise 
the  prices  of  farm  products. 

Increasing  use  of  machinery. — The  quantity  of 
food  and  raw  materials  consumable  by  each  human 
being  is  limited,  whereas  the  value  that  machinery 
may  add  to  materials,  is  almost  or  quite  illimitable. 
One  dollar’s  worth  of  material  is  often  manufactured 
into  many  hundreds  of  dollars’  worth  of  products. 
Thus  the  proportion  of  machinery  to  population  is 
continually  increasing  and  that  of  itself,  under  ordi¬ 
nary  circumstances,  must  cause  a  moderate,  nat¬ 
ural  and  continued  flow  of  population  from  agricul¬ 
ture  to  manufactures,  from  country  to  city  life. 
Improved  machinery  makes  the  trades  at  least  tem¬ 
porarily  more  remunerative  than  farming;  but  this 
is  being  constantly  offset  by  the  application  of  better 
machinery  and  methods  to  agriculture,  making  it 
more  profitable  and  pleasant. 

No  ordinary  event  can  check  great  economic  laws. 
— The  economic  laws  which  determine  production, 


BUSINESS  CONDITIONS 


83 


distribution  and  consumption,  are  too  great  to  be 
stopped  in  their  onward  progress  by  even  extraordi¬ 
nary  happenings.  Thus  the  great  fire  in  New  York 
in  1835,  with  all  its  enormous  destruction  of  capital, 
did  not  stop  the  real  estate  boom  then  on,  nor  did 
the  Spanish  war,  the  Russo-Japanese  conflict,  or  the 
great  ’Frisco  fire  in  1906,  stop  the  good  times; 
showing  how  great  is  the  impetus  when  one  of  these 
movements  gets  fully  under  way.  It  moves  on  as 
irresistibly  as  destiny  itself,  unless  at  the  time  of 
these  events  the  apex  of  prosperity  has  been  nearly 
reached,  so  that  the  workings  of  the  law  favor  or 
would  soon  favor  a  decline. 

The  influence  of  such  happenings  is  at  the  mo¬ 
ment  merely  to  accelerate  or  retard  the  workings  of 
the  law,  not  to  upset  its  action.  The  great  burden 
of  the  losses  inflicted  is  felt  later,  when  the  decline 
is  reached. 

Manufacturer  forced  to  produce  cheaper. — The 

rise  in  wages  and  materials,  by  reducing  the  profits 
of  the  manufacturer,  forces  him  to  adopt  means 
that  will  reduce  the  cost  of  production  and  distri¬ 
bution,  such  as  improved  machinery,  better  fac¬ 
tories  and  better  business  methods.  These  often 
work  a  hardship  for  the  individual  later  on,  as  he 
may  have  overenlarged  his  plant  or  overextended 
his  operations;  but  the  public  sooner  or  later  gets 
the  benefit  in  reduced  prices. 

Money  still  coming  from  West  and  Europe. — 
Money,  attracted  by  the  high  rates  in  New  York,' 
comes  here  from  the  West  and  from  Europe  still, 
and  is  principally  occupied  on  Wall  Street  in  main¬ 
taining  the  high  prices  now  prevalent  there. 

Real  estate. — Real  estate,  being  the  most  perma¬ 
nent  form  of  investment,  is  the  last  developed  and 


84  HOW  TO  FORECAST 

the  last  in  which  speculation  sets  in;  it  has  begun, 
as  we  have  seen,  in  an  investment  movement,  shortly 
after  the  securities  panic  and  in  certain  cities  even 
before;  but,  proving  profitable,  it  now  attracts  (in 
cities  receiving  the  greatest  tide  of  immigration  and 
advertising)  the  attention  of  the  speculator.  As 
real  estate  goes  up  in  price,  it  tends  to  increase  the 
cost  of  production,  as  rent  enters  largely  into  the 
cost  of  living,  factory  and  office  sites,  railroad  termi¬ 
nals,  etc.  The  extension  of  main  and  branch  line 
railroads  necessitates  new  towns,  and  these  are  now 
seized  upon  by  the  speculator  as  presenting  a  good 
opportunity  to  realize  quick  profits. 

Employers  concede  to  striking  workmen. — The 
working  man  is  now  well  employed  and  does  not  so 
often  indulge  in  strikes,  and  when  he  does  they  are 
sooner  settled.  Employers  generally  concede  the 
most,  as  they  cannot  afford  to  risk  a  shut-down 
when  orders  may  already  be  behindhand.  Strikes 
are  consequently  not,  as  a  rule,  so  bitter,  unless  the 
recognition  of  the  trade  union  is  required,  in  which 
case  the}'  are  more  lasting  and  harder  to  handle. 

Rise  in  wages. — There  comes  a  larger  and  more 
substantial  rise  in  wages  when  prosperity  has  suffi¬ 
ciently  progressed,  and  prices  have  advanced  enough 
to  warrant  corporations  paying  larger  or  additional 
dividends.  The  great  scarcity  of  men,  and  the  very 
important  fact  that  business  is  so  good,  makes  em¬ 
ployers  yield  in  whole  or  in  part  to  the  demands  of 
their  employees.  The  worker  argues  that  everything 
costs  him  more  and  it  is  only  fair  he  should  have 
some  benefit  from  the  better  times.  The  rise  in 
wages,  however,  is  very  seldom  commensurate  with 
the  rise  in  commodity  prices,  so  that  if  it  were  not 
for  the  more  steady  employment  and  longer  hours 


BUSINESS  CONDITIONS 


85 


in  certain  lines  and  the  larger  number  employed, 
it  would  work  a  universal  hardship  on  the  workmen. 
In  fact,  it  does  in  many  cases,  and  those  suffer  who 
are  living  on  a  fixed  income  and  have  to  meet  in¬ 
creased  expenses.  To  this  class  the  high  prices  may 
seem  almost  unbearable  before  the  reaction  comes. 

Trade  unions  grow. — Good  times  encourage  the 
growth  and  extension  of  trade  unions,  begetting  a 
spirit  of  independence  in  the  men  and  a  disposition 
often  to  throw  up  an  occupation  which  may  not  be 
to  their  entire  satisfaction. 

Immigration  grows. — Immigration  is  greater  as 
prosperity  increases  and  becomes  known  abroad  and 
advertised,  as  it  were,  by  the  remittances  that  for¬ 
eigners  here  send  to  their  friends  in  Europe.  Some 
of  these  remittances  are  used  to  purchase  tickets 
for  our  shores.  The  news  of  the  arrival  of  the 
money  spreads  rapidly  where  it  is  received  and  the 
advice  to  come  here  induces  many  to  start  and  try 
their  luck,  hoping  to  do  as  well  as  the  sender,  whom 
they  generally  know. 

Railroads  buy  other  roads. — At  this  time  railroads 
purchase  other  roads  or  their  stock,  and  incur  ex¬ 
penses  freely  in  the  faith  that  they  will  be  able  to 
pay  for  it  all  at  some  future  time;  but  when  these 
obligations  mature  later  on,  the  money  market  is 
likely  to  be  exhausted  from  the  many  demands  made 
upon  it  by  business  and  stock  market  interests. 

Wall  Street  market  now  speculative. — The  Wall 
Street  market  now  is  likely  to  be  a  professional  one, 
stocks  being  so  high  and  the  attraction  of  rising 
prices  having  ceased.  The  operations  of  profes¬ 
sional  speculators  have  little  or  no  permanent  bear¬ 
ing  on  the  market,  being  mostly  confined  to  certain 
speculative  shares,  and  showing  merely  whether  the 


86 


HOW  TO  FORECAST 


buyers  or  the  sellers  are  at  the  moment  in  the  as¬ 
cendant.  “Stocks  now  become  wall  flowers,  and 
business  does  the  dancing.” 

Stocks  set  aside  by  business. — “Bulls  and  bears” 
do  not,  as  people  think,  always  make  prices.  It  is 
the  times  and  conditions  that  are  the  main  govern¬ 
ing  factors.  As  long  as  the  public  back  them  up, 
prices  advance,  but,  having  reached  the  limit,  the 
public  have  now  departed  from  the  market  and  have 
left  it  to  the  manipulator.  Stocks  have  ceased  to 
rise,  and  both  a  commercial  and  a  stock  boom  can¬ 
not  be  run  successfully  at  the  same  time.  Past  ex¬ 
perience  has  shown  that  the  stock  boom  Anally  has 
to  retire  in  favor  of  business,  having  had  its  day. 


IX. — Latter  Part  of  Boom  Period 


Business  Increasing  at  Expense  of  Stock  Specula 
tion — About  13  Years  after  Commercial  Panic. 


[Note — These  conditions  last  occurred  about  1906. 
If  the  next  commercial  panic  takes  place  in  1913,  for 
example ,  they  may  be  expected  to  repeat  themselves 
about  1926.] 

FROM  two  to  three  years  after  the  financial 
panic  Wall  Street  has  again  locked  up  a  lot 
of  money  in  stocks  at  inflated  prices.  Inter¬ 
est  returns  are  lost  sight  of,  hopes  have  been 
discounted  and  stocks  of  good  companies  yield  less 
than  their  bonds.  The  banks  are  overloaned,  the 
money  is  badly  needed  in  legitimate  lines,  and  busi¬ 
ness  makes  desperate  efforts  to  get  it  back  by  forc¬ 
ing  holders  of  stocks  to  liquidate.  Stocks  are  now 
so  high  that  they  yield  but  small  dividend  returns, 
whereas  commercial  rates  have  been  quietly  rising 
and  are  now  probably  two  per  cent,  higher  than  the 
average  stock  yields.  Since  money  goes  to  the 
highest  bidder,  the  fight  is  an  unequal  one,  and 
stocks  are  doomed  to  defeat.  This  is  indicated  from 
time  to  time  by  spasms  in  call  money,  stringency 


88 


HOW  TO  FORECAST 


in  time  money,  recurrent  bank  statement  deficits, 
and  violent  fluctuations  in  stocks,  whose  values  the 
manipulators  and  large  speculators,  now  desperate, 
are  trying  vainly  to  uphold,  despite  the  reaction 
which  has  set  in. 

Bull  combines  beaten. — “The  slow  attrition  of 
Dear  attacks,  the  dribble  of  long  stocks  from  tired 
holders  and  the  accumulation  of  interest  charges” 
finally  down  the  bull  combines,  and  a  slow,  quiet 
reaction  in  prices  begins,  notwithstanding  the  stub¬ 
born  efforts  of  the  bulls  to  resist  it.  Their  prom¬ 
ises  have  all  failed  and  they  are  discredited  proph¬ 
ets.  The  support  that  manipulators  give  stocks  has 
finally  become  so  self-evident,  that  it  arouses  the 
suspicions  of  the  public  and  drives  them  away. 

Stocks  are  now  so  inflated  that  they  become 
water-logged  and,  like  some  old  derelict  on  the 
ocean,  are  abandoned  to  the  winds  and  tides  of  the 
financial  seas,  with  but  few  to  watch  their  wander¬ 
ings.  A  high  rate  of  dividend  is  not  sufficient  to 
support  the  price  of  a  stock  under  these  conditions, 
as  was  seen  in  the  first  six  months  of  1907,  when 
stocks  shrunk  two  billions.  Union  Pacific  fell  over 
60  points,  though  paying  10  per  cent,  dividends,  and 
similar  declines  occurred  in  Chicago  &  Northwest¬ 
ern,  Great  Northern,  Northern  Pacific,  etc. 

Bankers  discriminate. — At  this  time,  when  the 
pressure  for  money  is  growing  severe,  bankers  com¬ 
mence  to  discriminate  in  their  loans  against  “wild¬ 
cats”  and  all  industrials,  and  this  is  perhaps  one  of 
the  earliest  signs  of  the  coming  change. 

Improvement  general;  business  takes  money  from 
speculation. — The  improvement  in  general  business, 
the  growing  steadiness  in  values,  and  the  gain  in 
confidence  have,  as  we  have  seen,  had  a  strong  in- 


BUSINESS  CONDITIONS 


89 


fluence  in  drawing  away  capital  from  speculative 
employment.  “Wall  Street  operations  are  founded 
on  money — the  surplus  funds  of  the  community  at 
large;  and  when,  to  move  his  crops,  to  operate  his 
mills,  or  for  other  reasons,  the  real  owner  of  the 
money  demands  its  return.  Wall  Street  must  com¬ 
ply  and  look  elsewhere  for  capital.”  For  a  time, 
capital  is  obtained  from  Europe  by  paying  high 
rates  for  the  accommodation. 

When  agricultural  and  commercial  demands  be¬ 
come  sufficiently  great,  they  work  along  the  lines 
of  least  resistance.  They  take  money  for  their  pur¬ 
poses  from  those  sources  from  which  it  is  easiest  to 
get  it,  where  it  is  in  a  semi-fluid  condition  already, 
and  easily  convertible.  The  most  important  of  these 
sources  is  the  stock  market. 

Rising  prices  give  merchants  the  debt  habit.— 

The  stimulus  to  commercial  enterprise  and  expan¬ 
sion  resulting  from  high  commodity  prices  and 
large  profits,  from  having  money  or  credits  on  hand, 
and  from  seeing  friends  making  money,  induces 
merchants  and  others  to  borrow  more  money  than 
they  have  ever  borrowed  before  and  to  run  in  debt 
further  than  is  advisable — a  habit  that  breeds 
trouble  for  them  later  on. 

Steadily  rising  prices  are  sure,  if  continued,  to 
appeal  to  the  speculative  side  of  man’s  nature,  and 
to  draw  into  the  vortex  of  speculation  people  from 
all  walks  of  life. 

Each  successive  boom  has  a  solid  basis. — There 
is  a  legitimate  basis  for  the  boom  in  each  kind  of 
property,  as  it  comes  in  succession,  beginning  with 
stocks  and  ending  with  realty.  Each  must  show  a 
handsome  profit  before  being  taken  up.  Thus  the 


HOW  TO  FORECAST 


50 

boom  in  copper  started  in  1906  on  a  showing  of  100 
per  cent,  profit  on  every  pound  of  copper  mined. 

Proof  that  speculation  is  rife. — A  sure  indication 
that  speculation  is  in  the  saddle,  accompanied  by 
greater  carelessness  and  waste  in  all  lines  of  busi¬ 
ness,  is  now  shown  by  an  increase  in  the  number  of 
failures,  with  greater  and  more  fraudulent  liabili¬ 
ties.  This  period  is  marked  by  steadily  decreasing 
cash  reserves  compared  with  bank  loans  and  dis¬ 
counts.  The  cash  is  in  hand-to-hand  circulation,  and 
later  is  used  in  the  form  of  gold  exports  to  satisfy 
foreign  demands  because  of  lessened  exports  of 
commodities.  Extravagance  of  both  municipal  and 
central  governments  is  another  significant  feature. 

When  loans  exceed  deposits  at  New  York,  the 
great  money  center,  or  the  surplus  is  below  the  25 
per  cent,  required  by  law,  it  shows  that  banks  are 
making  excessive  loans,  or  that  they  have  them¬ 
selves  invested  heavily  in  securities. 

Car  shortage  on. — A  car  shortage  is  likely  to  ap¬ 
pear,  due  to  the  excessive  amount  of  freight  han¬ 
dled,  and  when  passenger  cars  are  side-tracked,  as 
is  now  sometimes  the  case,  in  favor  of  fast  freights, 
it  is  an  indication  that  the  condition  is  becoming 
acute  and  congestion  is  threatened.  This  adds  to 
the  already  stringent  condition  of  the  money  market 
by  delaying  goods  on  the  way  to  the  retailer  or  ma¬ 
terial  shipped  to  the  manufacturer,  thus  tying  up 
capital  for  the  time  and  rendering  collections 
slower. 

New  stocks  and  bonds  yield  better  returns. — The 

railroads  badly  need  new  equipment,  rails,  and  term¬ 
inals.  They  issue  new  stocks  and  bonds  to  secure 
the  required  money,  but  these  have  to  yield  a  much 
higher  rate  of  interest  to  the  investor  than  the  old, 


BUSINESS  CONDITIONS  91 

for  they  must  meet  the  market  rates.  Their  ap¬ 
pearance  in  competition  with  other  securities  ac¬ 
celerates  the  fall  of  the  older  issues  and  tightens  up 
the  money  market.  Convertible  bonds,  issued  at 
this  time,  are  a  concession  made  to  buyers  to  induce 
them  to  purchase. 

Higher  interest  rates  indicate  increased  profits. — 

The  rise  in  interest  rates  indicates  the  enormous  in¬ 
crease  in  all  lines  of  business.  While  prices  are  ris¬ 
ing  the  higher  rates  are  readily  paid  out  of  the  large 
profits  earned,  but  later,  as  profits  diminish,  the 
high  rates  become  onerous  and  have  to  fall.  Mean¬ 
while,  the  craze  for  buying  everything  purchasable 
extends  to  the  markets  for  household  supplies  and 
luxuries,  and  extravagance  becomes  general. 

When  to  sell. — A  writer  gives  the  following  as  a 
good  time  to  sell:  ‘"When  the  rise  caused  by  exces¬ 
sively  good  times  has  gone  so  high  that  loans  and 
discounts,  after  a  steady  and  long  continued  rise, 
either  become  stationary  for  a  period  or  else  de¬ 
crease  progressively,  coincident  with  a  steady  de¬ 
crease  in  available  funds.” 

Liquid  capital  turned  into  fixed. — Too  great  an 
increase  in  productive  power  in  the  form  of  fac¬ 
tories,  mills,  etc.,  now  taking  place,  is  a  useless  du¬ 
plication,  and  so  changes  liquid  into  fixed  capital. 
This,  however,  is  not  as  injurious  to  the  world  at 
large  as  if  the  capital  were  tied  up  permanently  in 
a  non-producing  form  and  its  usefulness  thereby  de¬ 
stroyed. 

Increase  in  currency  and  gold. — A  quiet  inflation 
of  the  currency  has  been  going  on  for  some  time 
past,  stimulating  speculation,  extravagance  and 
waste  on  all  sides.  The  gold  we  import  from  Eu¬ 
rope  now,  instead  of  going  to  strengthen  the  gold 


92 


HOW  TO  FORECAST 


reserve,  is  often  used  to  prevent  the  liquidation  that 
nature  is  trying  to  enforce,  or  to  inflate  prices  still 
higher  that  are  already  too  high.  This  inflation  and 
that  caused  by  war  have  often  been  mistaken  for 
true  prosperity,  instead  of  being  recognized  as  an 
unduly  stimulated  condition,  that  must  be  paid  for 
later  on. 

Government  surplus. — As  the  volume  of  business 
increases  the  demand  for  money  grows  with  it, 
until  the  attention  of  Wall  Street  (Wall  Street  first, 
because  at  the  time  it  is  most  in  need  of  money,  and 
because  it  is  the  great  market  for  money)  and  later 
on  the  attention  of  the  merchant,  are  called  to  the 
large  amount  of  idle  capital  in  the  government’s 
possession.  They  demand  that  this  idle  fund  shall 
thereafter  be  lessened.  This  gradually  helps  beget 
a  tariff  agitation,  which  becomes  more  insistent  as 
business  profits  are  narrowed  down — even  though 
the  surplus  may  In  the  meantime  have  turned  to  a 
deficit.  Tariff  revision  generally  results,  which  in 
itself  is  always  unsettling.  It  first  affects  business 
lines,  and  some  time  is  always  required  to  readjust 
credits.  In  consequence  many  writers  have  as¬ 
cribed  this  as  a  cause  of  panic,  rather  than  as  an 
effect  produced  by  other  and  greater  causes. 

Banks  overloaned. — When  banks  overloan,  they 
often,  instead  of  reducing  their  loans,  take  out  new 
circulation,  and  attracted  by  big  interest  rates,  loan 
this  money  out  in  order  to  increase  profits,  instead 
of  keeping  it  in  their  reserves. 

Scarcity  of  labor  injures  business  and  railroads. — 
The  great  scarcity  of  labor  that  has  existed — two 
jobs  for  ever}'-  unemployed  man — has  been  a  mate¬ 
rial  factor  in  increasing  costs;  for  not  only  is  labor 
scarce,  but  its  efficiency  or  producing  value  has 


BUSINESS  CONDITIONS 


03 


fallen  off  considerably.  This  affects  all  lines,  but 
particularly  the  manufacturer  and  the  railroads. 
The  New  York  Herald,  June  24,  1907,  quoting 

Frank  A.  Vanderlip,  President  of  the  City  Bank, 
says:  “With  the  advanced  wages  of  the  last  three 
or  four  years  labor  has  on  an  average  shown  a  de¬ 
creased  efficiency  of  20  per  cent.” 

Inflation  breeds  further  inflation. — An  increase  of 
prices  caused  by  inflation  calls  for  still  further  in¬ 
flation,  as  it  takes  more  money  now  to  do  the  same 
amount  of  business. 

As  values  continue  to  rise  they  finally  reach  a 
point  where  the  wage  earner  and  the  man  with  a 
fixed  income  are  at  a  disadvantage,  and  the  owners 
of  commodities,  real  estate,  etc.,  have,  because  of 
the  inflated  prices  of  their  property,  a  decided  ad¬ 
vantage. 

Purchasers  do  not  buy  as  eagerly  as  formerly  in 
anticipation  of  their  wants.  There  is  not  the 
money  in  it  for  the  purchaser  that  there  was,  as 
prices  are  not  rising  as  they  formerly  did.  This  in¬ 
dicates  that  the  top  is  nearly  reached. 

Dividends  increased  to  offset  higher  interest  rates. 
— When  business  increases  in  boom  times  and  inter¬ 
est  rates  are  high,  in  consequence  of  the  great  de¬ 
mand  for  money,  so  that  it  will  not  pay  to  hold  high 
priced  stocks  yielding  small  returns  on  the  invest¬ 
ment,  there  is  an  endeavor  on  the  part  of  those  in 
control  to  meet  the  emergency  by  raising  the  divi¬ 
dends  of  stocks  so  far  as  it  is  possible,  with  an  idea 
of  selling  out  to  the  public;  but  this  can  only  be 
done  in  isolated  cases,  and  is  not  effective  in  stem¬ 
ming  the  falling  tendency  of  stock  values  due  to 
lessened  money  supply.  A  great  deal  of  formerly 
liquid  capital  has  by  this  time  been  converted  into 


94 


HOW  TO  FORECAST 


fixed  values,  and  the  demands  of  business  are  now 
greatly  increased  by  high  commodity  values,  etc.  All 
want  more  than  they  can  get. 

Bonds  and  stocks  sold  to  get  money  to  loan. — 
Bankers  and  others  gradually  sell  their  stocks  and 
bonds,  attracted  by  the  higher  interest  obtainable 
in  the  money  market,  as  overproduction  and  exag¬ 
gerated  prices  compel  recourse  to  credit.  A  period 
of  dear  money  is  in  full  force. 

Masses  overdiscount  the  future. — The  sanguine 
temperament  of  the  masses  during  a  boom  leads 
them  to  overdiscount  the  future,  so  that  when  the 
results  are  accomplished  they  are  apt  to  be  disap¬ 
pointing,  and  a  small  fall  in  prices  occurs,  unless 
the  results  exceed  the  greatest  estimates. 

Generally  wrong  to  increase  money  supply  in  a 
stringency. — Increased  trade  activity  and  specula¬ 
tion  (to  which  there  can  be  no  limit,  except  through 
the  money  market)  have  absorbed  the  greater  gold 
and  currency  output.  For  years,  and  even  at  pres¬ 
ent,  the  erroneous  idea,  in  boom  times  when  money 
becomes  stringent,  has  been  to  increase  the  supply 
of  money  no  matter  how  badly  inflated  it  may  al¬ 
ready  be;  instead  of  allowing  natural  laws  to  work 
and  force  a  liquidation  that  will  bring  prices  and 
business  down  again  to  normal  conditions.  This 
always  has  the  effect  of  driving  out  foreign  capital 
and  causing  shipments  from  Europe  of  our  stocks, 
bonds  and  evidences  of  indebtedness.  It  sows  the 
seeds  of  distrust  at  home  also,  producing  a  curtail¬ 
ment  of  operations  and  a  drawing  in  of  capital. 
The  measures  we  take  should  always  be  of  a  kind 
to  assist  nature,  not  to  oppose  her. 

Many  spend  more  and  save  less. — The  masses 
have  spent  more  and  saved  less  than  they  do  under 


BUSINESS  CONDITIONS 


§5 

quieter  conditions,  and  many  go  so  far  as  to  capi¬ 
talize  hopes  and  spend  freely  on  the  strength  of  it. 
With  boom  times  comes  to  many  of  those  who  have 
succeeded  beyond  their  anticipations,  a  desire  for 
luxuries  and  self  indulgence,  which  begets  selfish¬ 
ness  and  greed  and  so  warps  their  minds  to  the 
rights  of  others  that  it  weakens  the  foundations  of 
integrity  in  business  as  well  as  in  social  life.  The 
hosts  of  desires  that  spring  up  clamoring  for  the 
means  of  indulgence,  call  continually  for  more  and 
more  money,  and  hence  the  disgraceful  disclosures 
that  show  up  so  plentifully  when  bad  times  set  in 
again. 

We  strain  our  credit  to  maintain  prices. — In  our 

eagerness  for  money,  to  meet  the  demands  of  busi¬ 
ness  and  our  own  inflated  plans,  we  seek  it  in  the 
lowest  market,  and  hence  at  this  time  always  accu¬ 
mulate  a  large  foreign  indebtedness.  We  keep  on 
borrowing  from  this  source  until  we  have  exhausted 
foreign  loanable  funds,  or  until  the  limit  of  our 
credit  is  reached,  or  both.  Especially  is  this  over¬ 
straining  of  our  foreign  credit  applicable  to  our 
railroads  and  to  Wall  Street  speculators,  the  latter 
using  it  at  first  to  raise  and  now  to  sustain  inflated 
prices,  to  the  detriment  of  everyone,  themselves 
included. 

The  greater  the  rise,  the  greater  the  reaction. — 

The  longer  the  period  of  uninterrupted  prosperity 
and  activity  and  the  greater  the  pace,  the  surer  and 
greater  is  the  ultimate  reaction;  but  no  one  cares 
to  entertain  such  thoughts  at  present,  for  everything 
is  booming. 

Excessive  interest  rates  contribute  to  high  prices, 
as  interest  enters  so  heavily  into  cost.  During  the 
boom,  manufacturers,  railroads,  etc.,  lose  sight  of 


96 


HOW  TO  FORECAST 


economy  in  the  rush  to  secure  orders  or  to  deliver 
on  time. 

Increase  in  incorporations  indicates  large  busi¬ 
ness. — The  turning  of  private  business  into  corpora¬ 
tions  and  the  formation  of  trusts  is  one  of  the  signs 
of  inflation.  It  indicates  a  larger  business  than 
individuals  can  carry  on  to  good  advantage,  and  also 
a  desire  to  produce  goods  cheaper  and  to  wield  more 
power,  and  sometimes  to  control  the  market  if  pos¬ 
sible.  It  allows  of  bank  loans  on  stock,  and  so 
opens  up  a  larger  line  of  credit.  This  is  not  a  bad 
feature  in  itself  were  it  not  that  the  stock  is  fre¬ 
quently  inflated,  and  often  promoters  are  able  to 
secure  the  services  of  bankers  to  assist  them  in 
the  flotation  of  their  stocks  at  exaggerated  values. 

Improved  methods  increase  gold  output. — New 
chemical  and  engineering  methods  and  a  larger  sup¬ 
ply  of  available  capital  are  in  a  measure  accountable 
for  the  greatly  increased  gold  output  and  for  a  large 
part  of  the  increase  in  ratio  of  wealth  in  the  United 
States  to  population. 

Developing  our  magnificent  resources. — Another 
cause  is  the  tremendous  resources  of  our  magnifi¬ 
cent  new  country.  Our  rapid  increase  in  popula¬ 
tion;  our  quickness  to  create  and  use  labor-saving 
devices,  making  labor  so  much  more  productive; 
our  freedom  of  government  and  of  the  conditions  of 
labor;  our  great  and  beneficial  mixture  of  nations; 
our  varied  climate  and  the  great  area  of  our  coun¬ 
try,  where  unhealthy  crowded  conditions,  as  in 
Europe,  do  not  exist — all  tend  to  make  the  United 
States  experience  a  greater  degree  of  prosperity 
than  Europe,  and  consequently  a  greater  reaction. 
The  extreme  swing  one  way  roughly  measures  the 
return,  as  in  the  movements  of  the  pendulum. 


BUSINESS  CONDITIONS 


97 


The  West  and  Uncle  Sam. — The  West  is  now 
using  considerable  money  developing  her  great  nat¬ 
ural  resources,  and  is  calling  upon  the  East  for  its 
surplus  funds,  so  adding  to  the  stringency  of  the 
money  market  in  the  East.  Uncle  Sam  is  also  add¬ 
ing  to  this  condition,  for  as  the  times  improve  his 
income  grows  larger  and  he  has  a  greater  surplus 
locked  up  in  his  vaults,  that  is  badly  needed  in  busi¬ 
ness.  Later  he  has  to  come  to  the  assistance  of 
the  money  market. 

Features  of  the  times. — When  great  increases  in 
clearings  in  interior  towns  .continue,  with  no  cor¬ 
responding  increase  in  quantities  of  goods  moved  or 
marketed,  it  means  that  speculation  is  spreading, 
conditions  are  unhealthy  and  legitimate  business  has 
ceased  to  expand.  The  trunk  lines  indicate  this 
condition  best,  as  they  carry  the  harvest  and  return 
laden  with  commodities.  Bank  clearings  are  now 
deceptive,  as  they  may  indicate  a  larger  business  due 
to  excess  of  speculation,  when  legitimate  business 
may  be  halting;  and  also  because  it  now  requires 
much  larger  clearings  to  transact  the  same  amount 
of  business  as  formerly,  because  of  high  prices. 

Very  high  and  fluctuating  rates  of  interest  on 
’change  without  apparent  cause  (as  in  Dec.,  1905), 
are  apt  to  be  due  to  overexpansion  of  credits,  and 
often  for  the  use  of  an  already  inflated  stock  mar¬ 
ket. 

Commodity  prices  go  up  so  high,  after  a  long 
period  of  good  times,  that  the  wage  earner  cannot 
save  as  much,  and  the  savings  banks  (having  less 
deposits)  consequently  buy  fewer  bonds  and  stocks. 

Public  leaving  stocks. — The  stock  market  is  now 
constantly  being  deserted  by  the  public,  as  not  only 
do  they  need  the  money  for  other  purposes,  but 


98 


HOW  TO  FORECAST 


many  realize  that  the  long  continued  bull  market 
has  finally  reached  the  point  (as  it  always  does 
where  success  has  been  long  continued)  where 
prices  represent  not  only  actual  values  but  capital¬ 
ized  future  hopes  as  well,  and  stocks  yield  much 
less  than  interest  and  therefore  are  unsafe. 

Quiet  decline  in  stocks  first. — This  condition  has 
started  a  quiet  decline,  hardly  noticed  at  first,  but 
continuing  despite  the  fact  that  nothing  has  hap¬ 
pened  to  injure  the  position  of  the  railroads  or  other 
industries.  Earnings  continue  phenomenal,  bank 
clearings  the  largest  ever,  and  all  departments  of 
the  nation’s  activity  appear  to  be  in  fine  condition; 
but  interest  returns  are  unsatisfactory  and  business 
needs  money,  and  there  is  a  shortage  of  it  because  of 
overexpanded  volume  of  business  and  speculation. 

Diminishing  bank  reserves. — Excessive  loans  and 
underwritings  by  bankers  on  rapidly  diminishing 
bank  reserves  are  another  feature  of  the  abnormal 
pressure  for  funds. 

The  securities  market  is  eventually  governed  by 
the  money  situation,  no  matter  how  hard  the  manip¬ 
ulator  and  others  may  at  times  try  to  avoid  that 
result. 


X.  Stock  Boom  Ends  First — Business 

Now  Affected 


About  Fourteen  to  Sixteen  Years  after  Commercial 

Panic. 


[Note — These  conditions  last  occurred  1907-1909.  If 
the  next  commercial  panic  takes  place  in  1913,  for 
example,  they  may  be  expected  to  repeat  themselves 
about  1927-1929.] 

WHEN  stocks  are  excessively  high  and  bank 
reserves  dangerously  low  and  obligations 
continue  to  increase,  it  is  only  a  question 
of  time  when  the  penalty  is  paid  through 
the  enforced  liquidation  of  stocks.  This  may  or 
may  not  be  accompanied  by  panic  conditions,  de¬ 
pending  chiefly  on  the  degree  of  confidence  entrust¬ 
ed  in  the  banks  at  this  time.  The  bank  reserves 
must  be  replenished  when  below  the  safety  limit, 
and  must  be  put  on  a  safe,  substantial  footing  as 
soon  as  possible.  Nature’s  way  of  doing  it  is 
through  liquidation. 

Man,  from  time  to  time,  has  tried  other  methods 
of  solving  this  question,  such  as  inflation  of  cur- 


100 


HOW  TO  FORECAST 


rency,  etc.,  but  at  best  these  are  only  temporary 
expedients,  leaving  the  situation  finally  worse  than  it 
was  before.  The  speculator  can  always  use  funds 
faster  than  they  can  be  supplied  to  him,  and  if  the 
process  is  continued,  doubts  arise  as  to  the  stability 
of  an  inflated  currency.  These  fears  increase  and 
finally  kill  all  confidence  and  so  close  up  all  avenues 
of  business,  and  gloom  and  depression  then  rule  in 
the  financial  and  commercial  worlds. 

Liquidation  in  stocks. — The  fall  in  stock  values, 
which  has  been  in  progress  for  a  year,  still  con¬ 
tinues,  followed  later  by  stagnation.  Prices  will  not 
rise  again  until  the  inflation  of  credit  has  passed 
by,  and  money  becomes  plentiful  by  reason  of  less¬ 
ened  demands  for  it  (as  late  in  ’o8).  When  that 
time  comes,  interest  rates  fall  to  a  minimum,  so 
that  capital  yields  small  returns  in  the  money  mar¬ 
ket;  and  stocks  in  the  meantime  have  fallen  so 
greatly,  that  dividend  returns  on  the  latter  compare 
favorably  with  the  small  interest  yields  in  the 
money  market. 

Consolidations  beget  distrust. — The  consolidation 
of  existing  manufacturing  and  business  houses  (pur¬ 
chased  at  extravagant  figures,  perhaps)  into  one 
large  corporation,  capitalized  on  a  sufficiently  liberal 
basis  to  yield  great  profits  to  the  promoters,  assist¬ 
ing  bankers  and  guaranteeing  syndicates  and  also 
to  allow  of  the  sale  of  the  stock  at  what  appears  to 
be  a  liberal  discount  to  the  confiding  public,  makes 
the  future  of  such  a  corporation  very  problematical 
to  say  the  least.  When  these  consolidations  have 
been  effected  in  many  industries  and  branches  of 
trade  and  many  new  corporations  have  been  formed, 
a  feeling  of  distrust  is  engendered  which  helps  to 
start  a  fall  in  values,  first  in  these  new  untried 


BUSINESS  CONDITIONS 


101 


shares  and  then  spreading  through  the  entire  list, 
not  sparing  even  those  which  make  an  increased 
dividend  showing. 

Recapitulation  of  progress  of  events. — The  prog¬ 
ress  of  events  is  as  follows:  Prosperity  ushers  in 
an  era  of  money  making,  evidenced  by  a  rise  in 
values,  by  increased  bank  clearings,  growth  in  the 
traffic  and  revenues  of  transportation  lines,  lessened 
mercantile  failures,  car  shortage  and  scarcity  of 
labor,  higher  wages,  consumption  outstripping  pro¬ 
duction,  and  a  general  feeling  of  confidence;  these 
carried  to  an  extreme  result  in  overproduction  (as 
compared  with  present  needs),  unwarranted  specula¬ 
tion,  extravagance,  and  excessive  prices;  then  comes 
a  fall  in  values,  exhaustion  of  capital,  and  fear,  end¬ 
ing  later  on  in  panic. 

We  are  now  very  sensitive  to  foreign  conditions. 

— Borrowing  heavily  from  Europe  as  we  now  are 
and  have  been  for  some  time  past,  our  markets  are 
very  sensitive  to  anything  that  affects  Europe  finan¬ 
cially,  fearing  the  loss  of  that  market  to  borrow 
from.  Undue  borrowing  abroad,  like  undue  inflation 
of  currency,  provokes  extravagance,  begets  great 
credits  and  eventually  undermines  public  confidence. 
The  country  is  plunged  into  debt  for  luxuries,  a 
foreign  balance  accumulates  against  us,  and  the  day 
of  reckoning  surely  follows.  These  conditions  now 
exist. 

Banks  supply  capital  to  manufacturers. — In  boom 
times  so  great  is  the  volume  of  business  done  that 
manufacturers  often  have  to  apply  to  the  banks  for 
loans  to  supply  temporary  working  capital,  much  of 
their  own  capital  having  been  absorbed  in  perma¬ 
nent  forms,  as  in  factories  and  the  like.  Thus  bank¬ 
ing  conditions  quickly  react  on  business. 


102 


HOW  TO  FORECAST 


High  interest  rates  eventually  wear  out  specula¬ 
tion. — A  high  rate  of  interest  long  continued,  will 
in  time  wear  away  an}'  speculative  movement,  and  if 
continued  unduly  will  seriously  affect  business  oper¬ 
ations;  and  when  business  is  on  an  inflated  basis  as 
at  present,  the  injection  of  the  element  of  fear,  espe¬ 
cially  if  directed  against  the  banks,  will,  if  the  finan¬ 
cial  tension  is  not  relieved,  bring  on  liquidation  and 
perhaps  panic. 

Pools  operating  now. — Pools  and  cliques  now  op¬ 
erate  on  the  stock  market  where  individuals  used  to. 
They  find  it  a  difficult  proposition  to  finance  their 
deals,  and  equally  hard  to  keep  up  prices  of  their 
favorite  stocks. 

Banks  borrow  at  home  and  abroad. — Many  banks 
have  borrowed  out-of-town  funds  at  high  rates  of 
interest  and  have  used  the  money  to  help  promote 
speculation.  These  borrowed  funds  form  the  basis 
for  enormous  loan  expansions.  The  banks  also  bor¬ 
row  from  abroad  to  bolster  up  their  reserves  and  to 
aid  further  expansion.  The  result  is  that  later  on 
our  exports  have  to  go  toward  settling  up  this  for¬ 
eign  indebtedness  instead  of  easing  finances  at  home. 

Western  banks  sold  stocks  first.- — Even  before 
Eastern  banks  were  forced  into  selling  stocks  the 
Western  banks  had  done  so,  as  their  relations  with 
the  stock  market  were  not  so  intimate,  and  the 
demands  of  business  in  the  West,  owing  to  the  great 
development  work  there,  were  even  more  urgent 
than  in  the  East. 

Syndicates  and  new  securities  out  of  favor. — “Syn¬ 
dicates,  formerly  hailed  with  delight,  also  new  secu¬ 
rities,  become  a  source  of  alarm  and  give  Wall 
Street  a  chill,”  and  are  now  abandoned  as  failures. 
For  a  time  they  are  floated  in  Europe,  as  a  last 


BUSINESS  CONDITIONS 


103 


resort,  at  a  higher  rate  of  interest;  but  as  American 
conditions  become  better  understood  abroad,  and  as 
conditions  there  also  become  poorer,  the  foreign 
market  for  new  securities  also  fails. 

High  prices  increase  imports. — Prices  are  so  high 
now  that  many  foreign  goods  are  sold  here  despite 
the  tariff  wall  we  have  erected;  and  foreign  pur¬ 
chases,  discouraged  by  our  high  prices,  fall  off,  so 
that  exports  decrease  in  many  lines  while  imports, 
owing  to  our  extravagance,  are  steadily  increasing. 
So  at  the  same  time  we  open  wider  the  flood  gates 
of  the  world’s  competition,  and  diminish  our  own 
resources  to  pay  with — a  decided  step  onwards 
toward  hard  times.  Later  we  attempt  to  shut  the 
gates  but  find  it  is  too  late,  for  the  damage  has  been 
done. 

When  maximum  of  employment  and  business 
activity. — I  quote  from  Burton  on  “Crises,”  pp.  183, 
89,  153:  “The  maximum  of  employment  somewhat 
precedes  the  date  of  the  highest  prices  and  fre¬ 
quently  precedes  the  maximum  of  production.” 

“In  the  period  of  exhaustion  preceding  a  depres¬ 
sion  imports  will  be  very  large,  and  will  bear  an 
unusually  large  proportion  to  exports.” 

“The  greatest  degree  of  prosperity  is  some  time 
before  the  breaking  out  of  the  crisis  or  commence¬ 
ment  of  the  depression.” 

Maximum  of  imports  and  activity  compared. — 

“In  a  debtor  or  developing  country,  the  maximum 
proportion  of  exports  to  imports  occurs  at  a  consid¬ 
erably  earlier  date  than  the  maximum  activity  (gen¬ 
erally  two  years),  and  indicates  that  the  greatest 
amount  of  business  activity  is  contemporaneous  with 
the  maximum  of  consumption  rather  than  with  the 


104 


HOW  TO  FORECAST 


maximum  of  production.  It  indicates  that  the  peo¬ 
ple  are  spending  freely/’ 

Government  deficit  apt  to  occur. — As  times  get 
poorer  government  revenues  fall  off  rapidly,  espe¬ 
cially  as  goods  now  accumulate  unsold,  many  of 
which  have  been  previously  purchased  in  hopes  of 
a  demand  which  does  not  materialize.  Finally  a 
government  deficit  occurs  and  a  new  tariff  may  be¬ 
come  a  necessity  to  replenish  the  exhausted  ex¬ 
chequer.  If  so,  instead  of  a  revision  downward,  it 
results  in  an  increase  in  rates,  much  to  the  disgust 
of  the  public,  and  to  the  loss  of  prestige  of  the  polit¬ 
ical  party  in  power. 

Overprosperity  breeds  adversity. — A  condition  of 
exceeding  prosperity  germinates  and  nourishes  the 
seeds  of  adversity.  It  begets  overconfidence,  reck¬ 
lessness,  overextension  of  credits,  overdoing  in  all 
lines  of  business,  greed,  corruption  and  extrava¬ 
gance — qualities  exactly  the  reverse  of  those  which 
caused  the  good  times.  When  corporations  and 
municipalities  have  set  the  example  it  is  no  wonder 
that  such  conditions  have  gradually  permeated,  all 
lines  of  business. 

International  fight  for  gold. — When  prosperity  is 
at  full  tide  the  active  commercial  nations  are  all 
using  a  good  deal  of  money,  and  an  international 
contest,  as  it  were,  for  gold  sets  in.  Each  nation 
tries  to  retain  the  gold  it  has  on  hand  and  to  acquire 
as  much  more  as  possible.  The  most  successful  in 
this  contest  are  the  most  progressive  nations,  with 
the  largest  resources  in  the  most  active  stage  of 
development.  These  are  the  bidders  that  can  afford 
to  pay  the  highest  price  and  so  secure  the  coveted 
gold.  Sometimes  the  price  proves  ruinous  in  the 
end. 


BUSINESS  CONDITIONS 


105 


Increased  failures  among  manufacturers  show 
lessened  profits. — For  some  time  after  prosperity 
has  reached  its  height  the  falling  off  is  not  clearly 
perceptible  in  the  volume  of  business  done,  but  the 
risks  of  business  grow  greater  and  the  margin  of 
profit  is  less.  Competition  becomes  so  active  that 
net  results  grow  poorer.  This  does  not  come  until 
the  working  capacity  of  manufacturing  and  business 
plants  has  been  greatly  increased.  Up  to  that  time 
there  has  been  more  than  enough  for  all,  and  hence 
no  need  for  active  competition — no  necessity  to 
hunt  for  orders  which  were  clamoring  to  be  filled. 
This  condition  of  lessening  profits  is  shown  by  the 
increased  number  and  amounts  of  failures  among 
the  manufacturers,  which  indicate  the  presence  of 
both  speculation  and  excessive  competition. 

Hard  to  be  honest  now. — Human  nature  finds  it 
very  hard  to  be  strictly  honest  in  times  of  feverish 
speculation  and  overtrading,  with  extravagant  habits 
and  desires  clamoring  for  gratification  and  the 
money  in  hand  for  the  purpose.  When  the  reaction 
sets  in,  many  find  it  a  struggle  to  maintain  their 
financial  standing.  As  a  consequence,  a  condition 
of  -financial  rottenness  shows  up  just  before  and  for 
some  time  after  a  panic,  that  is  most  deplorable,  and 
is  one  of  the  agents  quietly  at  work  sapping  our 
confidence  in  values  and  in  men,  and  so  adding 
later  on  to  the  panicky  and  depressed  feelings  of 
the  public. 

Neither  labor  nor  capital  fully  prosperous  now. — 

Neither  labor  nor  capital  at  this  time  enjoys  the 
full  measure  of  prosperity;  they  are  both  subject 
to  the  law  of  compensation  and  both  have  to  pay 
higher  prices  for  everything.  Toward  the  end  of 
good  times  the  margin  of  profit  grows  smaller,  indi- 


106  HOW  TO  FORECAST 

eating  growing  competition,  and  that  the  cost  of 
articles  is  advancing  faster  than  the  seller  can  raise 
his  prices  to  the  customer. 

Greater  sale  of  cotton  goods. — When  the  wage 
earners  and  those  with  stated  incomes  curtail  their 
purchases,  a  relative  increase  in  the  sale  of  cotton 
goods  is  observed,  as  they  are  necessary  staples  and 
cheap,  while  sales  of  silks  and  woolen  goods,  which 
are  higher  priced,  fall  off.  Likewise  automobiles 
and  diamonds  are  in  less  demand. 

Why  inefficient  business  men  have  succeeded. — 
Under  modern  conditions  large  profits  in  business 
are  realized  only  for  a  short  period.  Competition  is 
active  most  of  the  time,  and  the  margin  of  profit 
is  generally  small.  Close  attention  to  business  and 
to  small  savings  are  necessary  to  success.  But  the 
period  now  just  passing  has  been  exceptional.  The 
demand  for  goods  has  been  so  great  that  many  who 
would  not  have  the  qualifications  to  succeed  at  other 
times  have  done  well;  but  their  speculative  and 
overtrading  methods  come  to  grief  later  on,  and 
greatly  swell  the  list  of  failures.  The  test  of  de¬ 
clining  values  and  keen  competition  proves  too 
much  for  their  loose  and  speculative  business  meth¬ 
ods. 

Railroad  financiers  are  shown  preference  over 
merchants. — The  railroad  financiers,  doing  a  very 
large  business  through  banks  in  placing  their  stocks, 
bonds,  etc.,  naturally  are  closely  allied  to  the  great 
banking  interests,  so  that  merchants  are  apt  to  com¬ 
plain  from  time  to  time  of  the  preference  shown  to 
the  railroad  as  against  the  merchant  in  the  extension 
of  credits. 

Prices  rise  faster  than  wages. — Prices  of  commod¬ 
ities  and  rents  advance  faster  than  wages,  so  that 


BUSINESS  CONDITIONS 


107 


towards  the  end  of  the  prosperous  period  and  there¬ 
after  the  poorer  classes  complain.  In  New  York, 
especially,  meetings  are  likely  to  be  held  denouncing 
butchers  and  landlords  and  small  riots  may  occa¬ 
sionally  occur.  Still  later,  when  prices  become 
higher  than  workmen  can  stand  they  may  even  call 
the  boycott  to  their  aid. 

Car  shortage. — Car  shortage,  now  at  its  most 
acute  stage,  works  considerable  damage  to  the  busi¬ 
ness  interests  of  the  country  tending  to  restrict  out¬ 
put  and  to  compel  the  idleness  of  more  or  less  capi¬ 
tal.  Perishable  freight,  of  course,  suffers  the  worst 
of  all. 

Money  still  for  Wall  Street  but  conditions  un¬ 
healthy. — During  these  years  money  still  pours  into 
Wall  Street,  at  intervals,  from  all  over  the  country, 
to  take  advantage  of  the  high  rates  of  interest  of¬ 
fered — rates  that  are  bound  soon  to  fall,  as  they  are 
prohibitive  to  all  non-speculative  lines  of  business. 
In  our  last  boom  several  of  the  banks  and  trust 
companies  in  New  York  City  paid  as  high  as  four 
per  cent,  to  get  out  of  town  deposits  to  help  main¬ 
tain  inflated  prices,  and  these  prices  formed  the  basis 
for  a  further  great  expansion  of  loans.  Frequent 
spasms  in  the  money  and  stock  markets  emphasize 
the  feverish  and  unhealthy  condition  of  affairs,  and 
the  desperate  efforts  being  made  to  resist  the  con¬ 
tinued  fall  in  stocks. 

Why  merchants  now  sell  their  stocks. — A  falling 
market  and  high  interest  rates  make  merchants  who 
need  the  cash  sell  their  securities  rather  than  bor¬ 
row  at  exorbitant  rates.  This  adds  to  the  liquida¬ 
tion.  “It  is  a  law  that  speculation  will  run  its 
course  until  it  devours  [or  frightens]  capital,”  and 
both  events  are  now  occurring;  also  that  “the  vul- 


108 


HOW  TO  FORECAST 


nerability  of  a  speculative  market  increases  as  prices 
advance”  and  more  and  more  capital  is  thus  tied  up. 

Great  increase  in  municipal  indebtedness. — The 

increase  in  municipal  indebtedness  during  good 
times  is  something  enormous,  and  goes  on  so  quietly 
throughout  the  country  that  no  one  has  any  idea  of 
the  extent  of  it  until  the  panic  comes.  Afterward, 
many  municipalities  have,  in  past  cycles,  ceased 
payment.  Thus  the  Philadelphia  Social  Science 
Association  in  its  reports  1871  to  1879,  estimated 
that  in  1873  the  cities  of  the  United  States  owed 
one  billion  dollars,  on  four  hundred  millions  of 
which  payment  of  principal  or  interest  was  stopped 
when  the  panic  of  1873  came  on.  The  same  author¬ 
ity  figured  that  by  1877,  of  the  2,200  million  rail¬ 
road  bonds,  one-quarter  had  defaulted  interest;  and 
of  two  billions  in  railroad  shares,  three-quarters  in 
the  East  and  four-fifths  in  the  West  paid  no  dvi- 
dends,  and  all  the  roads  had  to  retrench  and  reform. 
Fortunately,  however,  for  us,  our  railroads  have 
now  passed  the  experimental  stage  and  the  territory 
through  which  they  run  is  fairly  well  peopled,  so 
that  such  a  deplorable  showing  is  not  likely  to  occur 
again.  We  may  hope  that  municipalities  also  have 
been  taught  a  lesson,  and  that  hereafter  they  will 
not  plunge  so  deeply  into  the  quagmire  of  debt. 

Excessive  prices  hurt  small  dealer. — During  this 
period  every  great  advance  in  wages  and  commodity 
prices  injures  the  small  dealer,  as  it  demands  more 
money  of  him  to  do  the  same  volume  of  business 
with,  besides  lessening  his  gains  and  so  compelling 
him  to  do  more  business  if  he  wishes  to  maintain 
his  usual  inflow  of  profits.  If  he  attempts  to  raise 
prices  as  a  last  resort,  his  sales  fall  off.  Moreover, 


BUSINESS  CONDITIONS 


109 


such  a  condition  is  likely  to  entail  a  greater  loss  of 
perishable  goods,  and  also  in  bad  debts. 

Prosperity  passing. — Great  prosperity,  with  all  its 
excesses,  is  now  about  to  pass  away,  to  be  sup¬ 
planted  eventually  by  the  other  extreme.  There  are 
two  things  that  must  be  taken  into  consideration  in 
comparing  the  good  and  bad  features  of  great  pros¬ 
perity,  which  are  not  shown  up  in  figuring  mathe¬ 
matically  on  the  rise  in  wages  as  against  the  rise  in 
commodity  prices.  One  is  the  increase  in  the  num¬ 
ber  of  establishments  in  which  certain  kinds  of 
labor  are  employed,  and  the  consequent  greater 
chances  for  advancement;  as  exemplified  in  the  evo¬ 
lution,  during  good  times,  of  the  house  servant  into 
the  factory  girl,  the  office  boy  into  the  stenographer 
or  clerk,  etc.  Yet  notwithstanding  this,  the  con¬ 
sensus  of  opinion  among  those  who  have  studied 
the  subject  is  that  the  wage  earner  in  boom  times 
does  not  get  his  full  share  of  the  benefits  arising 
from  the  great  activity  in  all  lines  of  business.  But 
it  might  here  be  added  that  the  compensation  of 
labor  has  been  steadily  increasing  from  the  “good 
old  times”  (so  called)  in  England,  when  the  labor¬ 
er’s  reward  for  a  day’s  work  was  only  a  penny  or 
two,  and  that  often  thrown  to  him  with  a  curse. 

Business  men  incur  indebtedness. — As  one  writer 
says,  in  good  times  many  of  the  railroads  and  busi¬ 
ness  men  seemed  to  be  engaged  in  piling  up  obliga¬ 
tions,  which  they  meet  with  a  smile  when  times  are 
good,  but  which  bring  the  sheriff  to  the  door  when 
bad  times  are  in  the  saddle.  Another  said  in  1864 
that  the  people  were  hopeful,  extravagant  and  in 
debt.  In  fact,  the  economic  waste  of  boom  times  is 
only  exceeded  by  the  ravages  of  war. 

Railroads  offer  short  time  notes. — Railroads  now 


110 


HOW  TO  FORECAST 


find  the  rate  of  interest  so  high  that  they  cannot 
afford  to  issue  long  time  bonds  on  such  a  basis — a 
policy  which  past  experience  has  shown  often  re¬ 
sults  in  ruin.  They  now  offer  short  time  notes  in¬ 
stead,  bearing  a  high  rate  of  interest.  These  sup¬ 
plant  the  long  time  bond  for  the  time  being,  as  they 
are  more  attractive,  running  for  a  short  time  only 
and  bearing  a  higher  rate  of  interest.  But  money 
becomes  so  very  scarce  that  it  is  difficult  to  float 
even  these  in  any  considerable  amounts.  Later  on, 
when  business  is  waning  and  money  is  thus  released 
in  large  amounts,  these  notes,  being  somewhat  dan¬ 
gerous  as  floating  liabilities,  besides  being  very 
costly,  are  replaced  with  long  time  bonds  bearing 
more  reasonable  rates  of  interest. 

Syndicates  terminate  with  a  loss. — Banking  and 
promotion  syndicates  may,  under  present  circum¬ 
stances,  find  it  impossible  to  sell  stocks  or  bonds, 
and  they  often  terminate  by  dividing  up  the  loss  and 
the  stocks  or  bonds  on  hand,  because  of  sheer  in¬ 
ability  to  secure  the  necessary  funds  to  complete 
the  operation. 

Increase  in  mortgage  indebtedness.— When  the 
increase  in  mortgage  indebtedness  grows  faster  than 
the  increase  in  realty  values  it  is  a  bad  sign,  for  it 
is  real  estate  and  mortgage  indebtedness  that  weighs 
most  heavily  on  the  public  in  times  of  panic  and  is 
the  hardest  to  get  from  under. 

Credit  will  not  always  take  the  place  of  capital. — 
“No  matter  what  book  profits  a  country  or  business 
may  show,  prosperity  cannot  continue  wdth  steadily 
increased  expenditures,  without  a  corresponding 
accumulation  of  capital.  Credit  will  take  its  place 
for  a  time  but  there  is  a  certain  end  to  that.” 

Thrift  is  begotten  in  the  school  of  hard  times. 


BUSINESS  CONDITIONS 


111 


Continued  good  times  lead  us  to  forget  these  les¬ 
sons,  and  they  can  only  be  taught  again  by  a  return 
to  adverse  conditions. 

Builder  for  profit  first  to  stop  when  materials  too 
high.  — When  materials  get  too  high,  the  first  one  to 
discontinue  operations  is  the  builder  who  is  build¬ 
ing  to  sell  again.  It  is  his  profit  that  is  absorbed  by 
the  excessive  rise  in  building  materials  and  lots. 

As  capital  becomes  fixed,  interest  rises. — Trade 
and  stock  activities  have  now  outrun  the  point  at 
which  they  can  be  financed.  Liquid  capital  has  been 
greatly  overworked  and  in  part  disappears,  and  as 
it  grows  less  the  use  of  the  diminishing  balance 
commands  a  higher  and  higher  rate  of  interest,  until 
the  rate  becomes  prohibitive  to  the  successful  car¬ 
rying  on  of  business.  Finally  the  amount  of  capital 
offered  is  so  small  that  it  is  practically  unobtainable, 
thus  forcibly  checking  further  expansion. 

Railroads  and  other  companies  retrench. — Rail¬ 
roads  and  industrial  companies,  finding  money  prac¬ 
tically  impossible  to  borrow,  issue  as  few  bonds  or 
notes  as  possible,  and  so  gradually  lessen  the  de¬ 
mand  for  money.  They  soon  discharge  workmen, 
and  confine  their  expenditures  to  those  absolutely 
necessary  for  the  maintenance  of  the  road  or  al¬ 
ready  contracted  for,  and  this  is  one  of  the  first 
great  checks  to  prosperity. 

Realty  movements. — The  action  in  real  estate 
varies  in  point  of  time  in  different  parts  of  the 
country.  An  advance  in  rents,  sufficient  finally  to 
make  it  cheaper  to  build  than  to  pay  rent,  starts 
very  quietly  what  might  be  called  a  consumptive  de¬ 
mand.  This  first  sets  in  some  years  before,  shortly 
after  the  financial  or  securities  panic.  It  is  a  de¬ 
mand  for  houses  and  lots  for  use,  and  has  no  ele- 


112 


HOW  TO  FORECAST 


ment  of  speculation  in  it.  The  lots  are  bought  to 
build  houses  on,  and  only  lots  for  this  purpose  are 
salable. 

In  the  East,  especially  in  parts  of  New  York  City 
— which  is  the  money  center,  and  whose  population 
is  increasing  rapidly,  not  only  by  births  but  also  by 
the  incoming  tide  of  immigration — this  movement 
may  begin  even  before  the  securities  panic.  Other 
cities  follow,  especially  those  where  the  tide  of  im¬ 
migration  has  been  flowing  for  some  time  past  into 
the  city  and  surrounding  country,  and  those  which 
the  newspapers  have  widely  advertised.  The  popu¬ 
lation  of  Los  Angeles,  for  example,  is  greatly  aug¬ 
mented  by  well-to-do  tourists  who  locate  or  visit 
there  in  large  numbers,  and  have  money  with  which 
to  buy.  In  such  localities  the  boom  flourishes  and 
runs  to  a  finish  (excepting  certain  parts  of  New 
York  and  suburbs)  earlier  than  in  the  greater  part 
of  the  United  States — like  the  Central  West,  which 
has  of  late  had  no  particular  advertising  or  excep¬ 
tional  increase  of  population,  but  has  moved  along 
quiet,  home-building  lines  only.  These  latter  sec¬ 
tions,  while  experiencing  a  betterment,  do  not  ex¬ 
perience  a  real  boom  until  more  favored  localities 
have  ceased  to  move,  or  even  later,  when  general 
business  may  be  on  the  wane. 

Bank  deposits  show  decreases. — “When  bank  de¬ 
posits  begin  to  show  decreases  during  boom  times, 
it  is  an  indication  that  these  deposits  of  credit,  as 
most  of  them  are,  are  gradually  ceasing,  due  either 
to  compulsory  measures  on  the  part  of  the  creditor, 
or  to  the  fact  that  people  prefer  to  pay  their  notes 
rather  than  to  seek  new  investments,  or  both.  This 
change  always  marks  the  beginning  of  a  decline  in 
the  price  level.” 


BUSINESS  CONDITIONS 


113 


Abandoning  of  new  enterprises  shows  less  busi¬ 
ness. — As  interest  rates  have  now  become  too  high 
to  permit  the  launching  of  new  enterprises  at  a 
profit,  they  are  consequently  abandoned;  and  this  is 
one  of  the  noticeable  signs  of  unhealthy  business 
conditions. 

Enforced  economies. — When  prices  have  gone  so 
high  that  people  living  on  a  fixed  income  and  the 
wage  earning  class  cannot  pay  them,  the  only  thing 
left  to  do  is  to  curtail  the  expense  account  by  lessen¬ 
ing  purchases  and  buying  cheaper  articles.  This 
marks  the  end  of  the  good  times  period.  The  result 
is  felt  immediately  by  the  manufacturer  in  a  loss 
of  orders,  and  he  has  the  alternative  either  to  in¬ 
crease  his  business  or  to  reduce  his  prices.  This 
latter  is  very  objectionable  to  him,  as  at  this  time 
he  has  not  yet  been  able  to  raise  his  prices  suffi¬ 
ciently  to  meet  the  last  increase  in  the  cost  of  raw 
materials  and  labor;  nor  does  he  wish  to  discharge 
valuable  help  that  he  may  need  in  the  future,  as  he 
is  still  hopeful  of  better  conditions.  Consequently 
he  elects  to  do  a  larger  business,  if  possible,  even 
at  a  smaller  percentage  of  profit.  Thus,  when  the 
masses  are  forced  to  curtail  purchases,  competition 
sets  in  for  the  lessened  business  in  sight  and  mer¬ 
chants  suffer  severely;  but  not  as  much  as  still 
later  on,  when  falling  values  turn  profits  into  losses. 

Money  stringency  and  perhaps  panic. — It  is  at 
this  time,  when  the  culmination  of  high  prices  has 
been  reached  and  reaction  sets  in,  when  business 
has  begun  to  decline  and  railroads  have  been  forced 
to  curtail  their  operations,  that  the  supply  of  ready 
money  becomes  so  limited  that  a  great  money 
stringency  occurs.  If  the  strain  on  the  money  mar¬ 
ket  is  too  great,  and  fear  of  the  banks’  solvency  be- 


114 


HOW  TO  FORECAST 


comes  wide-spread,  credit  will  be  suddenly  curtailed, 
and  a  run  on  the  banks  takes  place.  Hoarding 
ensues,  and  a  money  stringency  panic  is  on — the 
most  severe  by  far  of  all  the  minor  forms  of  panic. 

Such  a  panic  occcurred  in  December,  1907,  and 
came  close  to  occurring  in  1867  and  1887.  It  is 
doubtful,  however,  if  there  would  have  been  a  real 
panic  in  December,  1907,  had  it  not  been  for  the 
fact  that  several  of  our  old  New  York  banks  and 
trust  companies  had  come  under  the  control  of  rash 
speculators.  For  this  reason  the  financial  standing 
of  these  institutions  in  the  minds  of  the  public  be¬ 
came  so  weakened  that  with  the  approach  of  strin¬ 
gency  came  fears  of  their  stability.  Rotten  dis¬ 
closures  had  been  gradually  coming  out  for  some 
time  previous  and  the  great  moneyed  powers  saw 
the  absolute  necessity  of  eliminating  irresponsible 
speculators  from  the  control  of  important  financial 
institutions.  This  aim  could  be  accomplished  at  this 
particular  time  by  merely  refusing  to  extend  aid 
to  them.  The  fact  that  Morgan  and  the  New  York 
clearinghouse  banks  stopped  the  panic  after  it  was 
under  full  headway  showed  plainly  that  they  could 
have  stopped  it  at  the  start,  had  they  really  desired 
to  do  so.  This  was  done  in  1867  and  in  1887  when 
the  strain  came,  although  the  banks  were  then  com¬ 
paratively  weak  and  not  united,  whereas  now  they 
have  not  only  learned  to  act  in  unison  but  their 
power  to  carry  out  their  designs  is  almost  incon¬ 
ceivably  greater.  Such  a  panic  as  1907  is  not  likely 
to  occur  again  for  the  same  reason,  as  the  consoli¬ 
dation  of  great  banking  interests  that  has  been  going 
on  ever  since  and  the  lesson  already  taught  will 
probably  prevent  outside  speculators  from  again  at- 


BUSINESS  CONDITIONS 


115 


tempting  to  gain  control  of  banking  institutions  of 
any  great  importance. 

Money  stringency  at  this  point  in  the  cycle  occurs, 
luckily,  at  a  time  when  past  profits  have  been  large, 
so  that  the  people  are  able  to  stand  the  strain. 

Liquidation  necessary. — Liquidation  is  a  necessary 
prerequisite  to  the  progress  of  convalescence.  It  is 
a  readjustment  of  values  on  a  lower  basis  and  must 
go  far  enough  to  relieve  the  great  money  strain;  but, 
working  under  the  law  of  action  and  reaction,  prices 
will  go  as  much  too  low  as  they  went  too  high  pre¬ 
viously.  The  liquidation  is  apt  to  be  started  by 
some  prominent  event,  if  coincident  with  the  period 
of  change.  Thus  speculation  was  temporarily  halted 
in  1881  by  Garfield’s  assassination,  and  in  1901  by 
President  McKinley’s. 

Review  of  events  leading  up  to  panic  of  1907. — 

Commodity  prices  in  1907  rose  to  the  highest  point 
since  the  Civil  War,  creating,  with  speculation,  an 
excessive  strain  on  credit.  Commerce  had  increased 
2600  per  cent,  since  Jefferson’s  time  but  securities 
had  multiplied  a  thousand  fold.  Morgan  had  pur¬ 
chased  the  steel  interests  for  300  millions — a  most 
exorbitant  price,  many  thought — and  had  capitalized 
them  for  a  billion  and  a  half.  H.  II.  Rogers  had 
turned  forty  millions  of  copper  interests  into  a  veri¬ 
table  flood  of  securities.  Heinze  had  sold  Butte 
Coalition  to  the  Standard  Oil  Company  for  eleven 
millions  and  they  had  capitalized  it  for  forty  millions. 
Much  of  this  stock  was  sold  to  the  public,  who  were 
easily  induced  to  buy,  under  the  excitement  of  boom 
times,  when  men  with  names  of  great  financial  prom¬ 
inence  engineered  the  operations.  J.  J.  Hill  issued 
150  millions  of  new  securities  against  ore  lands  in 
Minnesota.  Ryan  had  issued  millions  of  traction 


116 


HOW  TO  FORECAST 


securities,  and  the  Metropolitan  Street  Railway  Com¬ 
pany  went  into  the  hands  of  a  receiver.* 

In  1907  alone  $2,102,555,000  in  new  securities  were 
issued,  for  it  is  far  easier  to  create  new  securities 
than  it  is  to  supply  new  money.  The  liquid  capital 
of  the  country  necessarily  became  greatly  dimin¬ 
ished,  and  we  suffered  the  consequences  of  inflation 
in  security,  commodity,  labor  and  realty  values,  and 
the  excessive  speculation  that  accompanied  it.  The 
wonder  is  that  the  collapse  did  not  come  before, 
especially  when  we  realize  that  some  of  our  banks 
and  trust  companies  were  under  the  control  of  reck¬ 
less  speculators.  In  fact,  fear  of  the  methods  of  one 
of  the  several  who  were  later  indicted,  was  the 
cause,  in  1907,  of  the  failure  of  five  of  our  best  finan¬ 
cial  institutions — among  them  one  of  the  oldest  in 
New  York,  which  had  been  a  pillar  of  strength  in 
previous  panics. 

Panic  bound  to  come. — The  elements  were  all 
there,  and  a  panic  was  bound  to  come.  Indeed,  it 
was  fortunate  that  it  came  when  it  did,  otherwise 
these  speculative  bankers,  operating,  as  they  would 
have  to  later,  on  a  falling  market,  would  necessarily 
have  plunged  deeper  and  deeper  into  the  mire,  and 
would  perhaps  have  acquired  control  of  bank  after 
bank  to  prop  up  their  falling  fortunes,  so  that  event¬ 
ually  a  dozen  Morgans  and  Rockefellers  could  not 
have  controlled  the  situation,  and  we  would  have 
had  the  worst  panic  that  the  world  has  ever  seen. 

Not  a  true  commercial  panic. — It  takes  a  long 
period  of  declining  profits,  shrinking  stock  and  com¬ 
modity  values,  losses  and  debts  to  make  a  lasting 
panic.  Panics  like  1907  are  to  be  classed  as  financial 
rather  than  commercial  panics  like  those  of  1873 


•Wall  Street  Journal.  Dec.  16,  1907 


BUSINESS  CONDITIONS  117 

and  1893.  The  financial  panic  does  not  clear  up  the 
atmosphere  like  the  commercial  panic,  by  reducing 
prices  in  general  and  checking  extravagance  for 
years  thereafter. 

A  sharp  rally  from  this  panic. — Later  a  rally  sets 
in,  business  is  better  for  a  time,  and  plenty  of  cheap 
money  enables  rich  manipulators  to  raise  stock 
prices  to  an  abnormal  height,  hoping  thereby  to  in¬ 
duce  the  general  public  to  come  in  and  buy — which 
they  never  do,  however,  to  any  great  extent.  Com¬ 
modity  prices  also  rise  again,  if  the  crisis  occurs  be¬ 
fore  prices  have  reached  their  limit;  and  if  good 
crops  are  garnered  business  is  better,  especially  with 
the  railways,  owing  to  the  great  reduction  in  their 
expenses,  as  well  as  to  better  business.  The  mer¬ 
chants,  however,  especially  the  retailers,  never  real¬ 
ize  again  the  former  boom  profits.  Confidence  has 
been  shaken  and  losses  have  been  too  heavy,  and  the 
excessive  cost  of  goods  does  not  permit  the  retailer 
to  charge  the  buyer  the  usual  per  cent,  of  profit. 

Competition  among  retailers. — At  this  period  the 
retail  merchants  complain  considerably;  for  while 
the  volume  of  business  is  large,  competition  among 
the  smaller  merchants  reduces  greatly  the  business 
done  by  each  individually.  When  times  were  good 
many,  incited  by  the  sight  of  others  making  money, 
went  into  'the  retail  business.  Others  went  into 
business  because  high  prices  reduced  so  greatly  the 
purchasing  power  of  the  interest  received  from  their 
investments  that  they  had  to  do  something  to  aug¬ 
ment  their  incomes.  Especially  is  this  the  case 
when  prices  remain  high  and  interest  rates  become 
low,  during  the  depression.  Therefore  at  this  time 
we  find  the  retail  business  overcrowded  and  net 
profits  comparatively  small,  while  the  wholesalers 


118 


HOW  TO  FORECAST 


are  doing  a  good  business.  The  competition  of  in¬ 
creased  numbers  in  their  lines  is  not  nearly  so 
severe  as  among  the  retailers,  owing  to  the  larger 
capital  and  greater  experience  necessary  to  embark 
in  a  wholesale  or  manufacturing  business.  Later, 
however,  increased  numbers  affect  these  lines  also. 

Stocks  again  weaken. — Stocks  are  the  first  to  fall 
again,  as  at  this  time  the  public  are  not  purchasing 
and  stock  prices  have  been  unduly  raised  by  manipu¬ 
lation,  operators  having  taken  advantage  of  the 
cheap  money  rates  following  the  reaction  to  force 
up  prices  on  borrowed  money.  The  great  increase 
in  imports,  due  to  extravagance,  and  the  relative 
falling  off  in  exports  because  of  the  prohibitive 
prices  of  many  of  our  exportable  products,  results  in 
exports  of  gold;  and,  because  of  the  greater  demand 
for  money  due  to  business  improving  after  the  crisis, 
bankers  call  in  many  of  their  speculative  loans. 
This  once  more  pulls  the  money  prop  from  under 
the  market  and  a  reaction  in  stocks  begins. 


XI. — Business  Declining 


Accompanied  by  Competition  and  Lessened  Profits, 
also  Falling  Values  and  Wages.  About  17  to  18 
Years  after  Commercial  Panic. 


[Note — These  conditions  prevail  as  this  book  is  writ¬ 
ten 1910.  They  may  naturally  be  expected  to  continue , 
in  a  general  ivay,  through  1911.] 

IF  a  panic  occurs  when  the  crisis  is  reached,  as  in 
1907,  stocks,  about  a  year  after,  will  have  rallied 
under  the  skillful  manipulation  of  large  opera¬ 
tors,  who,  with  low  interest  rates  to  help  out, 
will  once  more  be  in  the  saddle;  but  this  is  only 
temporary  and  a  downward  movement  sets  in.  This 
commences  when  our  heretofore  favorable  foreign 
trade  balance  is  so  greatly  diminished — by  reason 
of  the  prohibitive  prices  of  many  of  our  export 
products,  and  the  extravagance  of  purchasers  of 
imported  articles,  resulting  in  increased  imports  and 
lessened  experts — that  gold  has  to  be  exported  in 
large  quantities  to  pay  our  foreign  obligations.  For 
a  time  the  exchange  market  is  kept  partially  in  hand 
by  foreign  borrowings;  but  the  drain  of  gold  finally 


120 


HOW  TO  FORECAST 


compels  bankers  to  lessen  their  loans  to  stock  spec¬ 
ulators.  This  results  in  the  gradual  withdrawal  of 
support  from  the  market  and  in  quiet  selling  on 
every  bulge,  so  inaugurating  a  downward  movement 
in  stocks. 

Course  of  liquidation. — This  liquidation  is  event¬ 
ually  to  extend  through  all  lines  of  business,  in  sub¬ 
stantially  the  following  order:  First,  shares  of  cor¬ 
porations,  then  raw  materials,  then  manufactured 
goods  at  wholesale,  next  goods  at  retail,  then  rents, 
and  finally  real  estate  values.  Ready  money  is  over¬ 
worked  and  credit  becomes  exhausted,  the  latter 
being  expanded  out  of  all  proportion  to  the  gold 
reserve,  and  fear,  that  graveyard  of  prosperity,  is 
beginning  to  make  itself  felt.  Especially  is  stock 
liquidation  great  at  this  time  if  scandalous  disclos¬ 
ures  come  to  the  surface,  as  is  apt  to  be  the  case. 

Cliques  and  investors  now  own  stocks. — Stocks  are 
now  mostly  held  by  big  speculators  and  by  the  in¬ 
vesting  classes.  The  former  bought  stocks  from  the 
original  owners,  mainly  on  the  strength  of  bank 
credits,  in  order  to  sustain  prices.  Such  obligations 
they  have  to  pay  up  to  their  now  anxious  bankers. 
The  genuine  investor  buys  stocks  at  what  he  con¬ 
siders  bargain  prices  with  his  ready  cash,  and  of 
late  years  the  number  of  small  investors  who  have 
taken  advantage  of  sharp  declines  to  buy  has  greatly 
increased. 

Banks  overloaded  with  securities. — But  there  is 

still  a  great  mass  of  undigested  securities  in  the 
hands  of  underwriters,  and  other  first  holders.  Banks 
also  are  often  laden  with  securities  that  the  public 
does  not  want,  and  hence  are  not  able  to  give  satis¬ 
factory  assistance  to  their  merchant  clients.  The 
banks  now  have  to  refuse  to  finance  new  companies 


BUSINESS  CONDITIONS  121 

or  consolidations  of  any  kind,  and  finally  they  are 
compelled  to  limit  credits  greatly  because  of  their 
growing  fear  as  to  the  solvency  of  some  of  their 
customers,  and  because  of  gradual  withdrawals  by 
depositors  from  the  banks,  thus  lessening  their  aver¬ 
age  balances. 

Liquidation  gradually  extends  to  commodities. — 

When  the  decline  in  stocks  began  business  was 
active  and  remained  so  for  some  time  thereafter,  but 
the  trouble  is  plainly  seen  in  the  money  market,  and 
if  the  supply  of  ready  cash  remains  inadequate  after 
the  fall  in  stocks,  liquidation  then  extends  to  com¬ 
modities  and  affects  general  business,  inaugurating 
an  era  of  retrenchment  and  saving  all  along  the 
line. 

Reduced  railroad  buying. — As  railroads  are  the 
heaviest  consumers  in  many  lines  of  industry,  their 
greatly  reduced  purchases  seriously  affect  the  activ¬ 
ity  of  general  business. 

High  prices  have  checked  consumption. — High 
prices,  having  reached  the  limit  of  many  of  the 
purchasers’  ability  to  pay,  have  checked  consump¬ 
tion.  This  hastens  the  accumulation  of  a  surplus 
in  production,  and  thus  a  fall  in  prices — the  result 
of  excessive  competition,  oversupply  and  undercon¬ 
sumption;  and  finally  the  resulting  falling  off  in 
production  decreases,  in  a  measure,  the  urgent  call 
for  money. 

Easier  to  manufacture  goods  than  to  get  money. — 

Since  the  introduction  of  modern  machinery,  it  has 
always  been  easier  to  manufacture  goods  than  it  is 
to  secure  the  necessary  money  to  finance  the  output. 
The  withdrawal  of  a  large  body  of  purchasers  at  this 
time  expedites  the  process  of  liquidation. 

High  interest  rates,  high  priced  and  insufficient 


122 


HOW  TO  FORECAST 


labor  and  dear  raw  materials  reduce  profits;  and, 
with  a  money  stringency,  are  now  quietly  stifling 
most  new  enterprises  and  making  it  more  difficult  to 
continue  old  ones. 

Who  discharge  help  first. — During  money  strin¬ 
gency  many  of  the  first  to  discharge  hands  are  manu¬ 
facturers  who  are  doing  a  very  large  business  and 
who  cannot  secure  the  necessary  ready  cash  to  pay 
running  expenses,  especially  wages.  Suspensions 
and  failures  occur  at  this  time  in  greater  numbers 
among  manufacturers  than  in  any  other  class,  and 
especially  among  those  who  are  financed  in  the  East, 
where  the  money  stringency  is  greatest. 

High  prices  and  interest  lessens  gold  output. — It 
ma}^  be  noticed  in  passing  that  excessive  commodity 
prices  and  high  priced  money  and  labor  eventually 
make  gold  and  silver  mining  less  productive  and 
lessen  the  output  by  shutting  down  many  low 
grade  mines.  In  time  this  becomes  a  factor  in  again 
lowering  commodity  prices  and  reducing  wages;  but 
the  operation  of  this  influence  is  slow  and  extends 
over  a  period  of  years. 

Long  continued  prosperity  begets  indebtedness.— 

A  long  period  of  prosperity  begets  a  large  volume  of 
new  indebtedness,  which  finally  grows  so  great,  prior 
to  and  at  this  time,  that  it  helps  gradually  to  break 
down  credit  and  force  liquidation.  “Credit  demands 
a  rock  basis  to  rest  on,”  and  where  this  basis  gradu¬ 
ally  changes  to  the  shifting  sands  of  dishonesty,  debt 
and  speculation,  the  destruction  of  credit  follows 
and  liquidation  sets  in. 

Movement  from  city  to  country. — Excessive  com¬ 
modity  prices  force  many  from  the  city  to  the  coun¬ 
try,  there  to  become  producers  and  thereby  eventu¬ 
ally  to  lessen  the  prices  of  commodities.  This  move- 


BUSINESS  CONDITIONS 


123 


ment  assumes  large  proportions  as  the  times  grow 
harder  later  on. 

When  want  of  confidence  begins. — Want  of  confi¬ 
dence  sets  in  when  prices  are  so  high  as  to  raise 
doubts  of  their  permanency,  and  when  there  is  a 
lack  of  money  and  credit  to  do  business  on;  and 
this  occurs  when  the  overdoing  of  business  and 
speculation  cause  a  money  stringency,  for  no 
amount  of  money  and  credit  can  satisfy  the  demands 
of  speculation. 

Bank  credits  and  prices. — Contraction  of  bank 
credits  acts  in  exactly  the  same  manner  as  a  con¬ 
traction  of  the  currency  in  producing  a  fall  in  prices, 
and  this  fall  in  prices,  creating  distrust,  makes  it 
harder  to  get  bills  discounted  and  so  works  for 
lower  prices  still. 

A  few  prepare  for  what  is  coming. — A  few  far¬ 
sighted  business  men,  anticipating  the  general  trend 
of  events,  now  refrain  from  speculative  enterprises 
and  prepare  themselves  for  whatever  change  may 
be  coming. 

Prices  decline  before  production. — Prices  decline 
before  production;  for  when  the  price  of  an  article 
advances,  production  will  increase  until  demand 
lessens  or  overproduction  takes  place  and  prices 
decline.  Retail  prices  fall  more  slowly  than  whole¬ 
sale.* 

Iron  and  steel  a  barometer  of  trade. — The  iron  and 
steel  trade,  being  so  vast  and  its  ramifications  into 
other  lines  so  great,  is  generally  accepted  as  the 
barometer  of  trade.  In  dull  times  it  feels  the  reac¬ 
tion  more  keenly  than  any  other  business,  as  orders 
have  to  be  given  six  or  eight  months  ahead,  and 
these  are  often  cancelled  if  conditions  appear  un- 


*  Burton  on  Crises,  pp.  48  and  170. 


124 


HOW  TO  FORECAST 


favorable.  Many  of  these  orders  are  in  the  nature 
of  options,  accepted  on  the  faith  that  they  will  prob¬ 
ably  be  wanted,  and  sometimes  given  in  order  to 
secure  precedence  of  delivery  when  needed  later. 
This  liability  to  cancellation  occurs  in  other  manu¬ 
facturing  lines  (although  not  to  so  marked  a  de¬ 
gree)  and  consequently  may  change  the  business  as¬ 
pect  for  the  worst  at  very  short  notice.  At  this 
time  iron  and  copper  suffer  especially,  as  they  enter 
so  largely  into  new  construction  and  new  construc¬ 
tion  depends  on  new  investments,  which  have  prac¬ 
tically  ceased  at  this  period. 

Interest  rates  fall  with  commodities. — It  should 
be  borne  in  mind  that  during  a  slow  and  long  con¬ 
tinued  fall  of  commodity  prices,  interest  rates  will 
decline,  so  as  to  offset,  at  least  in  part,  the  gain  in 
purchasing  power  of  the  principal,  thus  tending  to 
maintain  a  proper  equilibrium.  Also,  as  profits  de¬ 
crease  in  business  undertakings  interest  rates  will 
fall,  for  the  latter  depend  on  profits  and  must,  in  the 
long  run,  come  out  of  profits. 

Speculation  shifts  to  commodities. — On  the  other 
hand,  when  speculation  in  the  securities  market  is 
dull,  we  often  see  traders  shift  their  operations  to 
the  speculative  commodity  markets — grains,  cotton, 
pork,  etc.  After  the  defeat  of  stocks  in  the  money 
market,  speculative  capital  is  no  longer  attracted  to 
stocks,  but  seeks  activity  on  the  produce  exchanges, 
where  commodities  are  most  readily  bought  and 
sold  and  where  values  are  less  intimately  connected 
with  the  rate  of  interest. 

Realty  next. — These  speculative  commodities 
gradually  become  less  inviting  from  being  over 
boomed.  Meantime  a  percentage  of  speculative  op¬ 
erators  have  wandered  into  the  next  most  attractive 


BUSINESS  CONDITIONS 


125 


field  of  operations,  which  because  of  previous  good 
showing  for  several  years  past  is  likely  to  be  city 
real  estate,  in  the  unboomed  cities  only.  This  specu¬ 
lators  can  manage  for  themselves  and  it  cannot  be 
juggled  with.  Less  capital  than  one  would  suppose, 
is  required  at  this  time  to  start  speculation  in  real 
estate,  as  it  has  already  gained  the  confidence  of  the 
people.  Investments  in  lots  and  houses  for  home 
purposes  have  for  some  time  been  fairly  heavy  and 
quite  satisfactory,  so  that  a  considerable  activity 
already  exists  in  this  line. 

Many  who  are  afraid  to  invest  in  bonds  turn  to 
real  estate  mortgages,  attracted  by  the  good  rate  of 
interest  paid  by  the  latter  and  by  the  solid  character 
of  the  collateral  offered.  This  money  helps  the  real 
estate  movement  by  supplying  necessary  funds  to 
aid  in  financing  it. 

A  condition  precedent  to  this  speculative  move¬ 
ment  is  a  decided  fall  in  interest  rates  and  a  surplus 
of  money  in  the  banks,  whereas  high  rents  are  still 
maintained,  they  being  the  last  to  decline.  The  fall 
in  interest  rates  in  this  case  has  the  same  effect  as  a 
rise  in  rents,  causing  a  marked  gain  in  the  percent¬ 
age  of  profit  paid  by  realty  in  comparison  with  other 
investments.  All  other  lines  having  been  tried  and 
exhausted,  real  estate  is  the  last  to  be  taken  up. 
Having  steadily  risen  when  other  commodities  and 
stocks  have  fallen,  and  with  a  fair  supply  of  idle 
money  at  reasonable  rates,  realty  of  late  has  proven 
a  very  attractive  field  to  the  speculator  who  inflates 
values,  often  in  a  manner  to  result  disastrously. 

As  this  movement  grows  it  is  joined  in  time  by 
many  merchants  who  have  a  surplus,  and  by  others 
that  are  doing  poorly  and  hope  to  make  outside 
profits,  and  still  later  on,  by  some  of  the  refugees 


126 


HOW  TO  FORECAST 


from  Wall  Street.  (It  is  when  this  boom  is  over 
that  the  public  find  themselves  weighed  down  with 
vast  obligations  which  prove  to  be  the  hardest  of 
all  to  liquidate.  It  is  then  that  the  fall  in  values  sets 
in  in  real  earnest  in  all  lines  and  becomes  excessively 
burdensome,  leading  to  a  rapid  exhaustion  of  re¬ 
sources  and  ending  in  panic.) 

Land  movement. — High  prices  for  their  products, 
with  mortgages  paid,  has  superinduced  heavy  land 
buying  in  those  Western  districts  where  lands  are 
still  cheap.  Many  of  the  purchasing  farmers  borrow 
of  local  banks  and  insurance  companies,  to  assist 
them  in  their  purchases,  so  incurring  a  considerable 
indebtedness. 

In  a  dull  market  the  element  of  convertibility  is 
lost. — As  the  market  becomes  dull,  one  great  essen¬ 
tia).  of  value  is  seriously  impaired,  viz.,  convertibility; 
and  values  recede  the  more  easily  in  proportion  as 
this  element  of  support  wanes. 

Both  jobbers  and  retailers  cautious. — When  prices 
commence  to  fall,  jobbing  houses  and  retailers  alike 
buy  as  little  as  possible,  in  order  to  avoid  losing 
money  by  the  fall  in  prices,  and  in  the  hope  of 
purchasing  cheaper.  This  is  a  serious  check  on 
production,  and  is  apt  to  overload  the  manufacturer 
with  stocks  on  hand  that  he  finds  it  hard  to  get  rid 
of,  and  eventually  sells  only  by  a  decided  reduction 
in  price  or,  in  some  cases,  by  resorting  to  the  auction 
mart. 

Manufacturer  most  affected. — The  manufacturer  is 
thus  affected  more  than  anyone  else,  for  not  only 
does  he  suffer  from  the  decreased  purchasing  of 
consumers,  but  he  has  now  to  carry  a  larger  propor¬ 
tion  of  finished  goods,  which  requires  considerable 
money.  It  is  no  wonder,  therefore,  that  this  condi- 


BUSINESS  CONDITIONS 


127 


tion  is  now  reflected  among  business  failures,  the 
proportion  of  increase  among  manufacturers  being 
decidedly  the  largest. 

Indices  of  liquidation. — Besides  the  features  above 
mentioned  as  conducive  to  a  period  of  liquidation, 
there  are  certain  indications  which  point  as  an  index 
finger  to  the  coming  change,  a  few  of  which  are 
given  below. 

Lessened  profits. — A  narrowing  down  of  the  mar¬ 
gin  of  profits  indicates  overproduction  and  overcom¬ 
petition.  This  feature  has  been  in  operation  for 
some  time  before  the  fall  in  values  which  is  now 
occurring. 

Imports. — A  gradual  falling  off  in  the  importation 
of  luxuries.  In  new,  developing  countries  like  the 
United  States,  imports  will  often  show  an  abnormal 
increase  prior  to  and  during  the  early  part  of  the 
depression,  and  will  grow  much  faster  than  exports 
until  within  about  three  years  of  the  panic.  This  in¬ 
tensifies  the  failing  times  by  running  us  into  debt 
and  causing  a  foreign  balance  against  us.  Some 
mistakenly  consider  these  large  imports  as  a  sign 
of  prosperity  whereas  they  are  simply  an  indication 
of  the  extravagance  of  the  people. 

Solicitation  of  orders. — The  solicitation  of  new 
orders  should  be  closely  watched  for  an  early  indi¬ 
cation  of  poorer  times.  Unusual  eagerness  of  the 
producer  to  secure  contracts  indicates  lessened  pur¬ 
chasing  and  increased  competition;  later  appears  a 
quiet  concession  in  terms  and  prices. 

Buyers  holding  back. — Another  indicator  is  that 
buyers  are  not  so  anxious  to  purchase  ahead,  and 
now  hold  back  their  orders  for  lower  prices.  Con¬ 
cessions  in  price  follow,  for  no  combination,  how- 


128 


HOW  TO  FORECAST 


ever  powerful,  can  resist  the  tendency  of  the  period 
for  any  great  length  of  time. 

Railroads  affected  before  industrials. — Railroad  • 
gross  earnings  may  for  a  short  time  increase  after 
the  top  wave  of  real  prosperity  has  passed,  but 
items  constituting  expense  have  so  increased  owing 
to  dear  labor,  high  interest  rates  and  high  cost  of 
materials,  that  net  earnings  show  a  lessened  per¬ 
centage  of  gain  or  even  a  loss.  As  a  rule,  they 
suffer  from  these  conditions  before  industrial  com¬ 
panies  do,  as  the  railroads  are  so  much  more  an 
object  of  public  attention  and  criticism  that  it  is 
very  difficult  for  them  to  raise  their  rates.  In  the 
long  run,  however,  the  railroads,  if  well  managed, 
keep  up  a  better  showing  than  general  business;  for 
finished  goods,  although  a  result  of  overproduction, 
have  to  be  marketed  some  time,  even  if  at  a  loss  to 
the  owner,  and  in  many  cases  old  orders  are  being 
filled  and  freight  rates  paid  on  them.  Besides,  the 
railroads  reap  the  benefit  of  the  efforts  of  those 
who  try  to  make  up  for  diminishing  profits  by  doing 
a  larger  business.  Still  later,  they  are  favored  by 
the  lower  commodity  prices  and  decreased  wages. 
They  are  also  able  to  practise  economies  in  mainte¬ 
nance  of  track  and  equipment  and  in  stopping  new 
construction,  resulting  in  a  great  reduction  in  ex¬ 
pense  account.  Again,  many  merchants  are  still 
hopeful,  anticipating  that  each  year  will  usher  in 
better  times,  endeavoring  to  do  more  business  and 
going  to  expense  for  that  purpose.  All  this  makes 
freight  for  the  railroads. 

Eastern  roads  show  a  decline  first,  as  the  East  is 
the  manufacturing  center  and  manufacturers  are  at 
this  period  more  affected  than  farmers  and  mer¬ 
chants.  Also  Eastern  roads  have  been  put  to  a 


BUSINESS  CONDITIONS 


129 


greater  expense  per  mile  than  Western  to  meet  the 
increased  traffic.  Their  terminal  improvements  and 
extensions  are  much  more  expensive,  and  are  often 
of  a  nature  that  does  not  yield  a  profit. 

Currency  in  circulation.— At  this  time,  normally, 
the  volume  of  currency  in  circulation  should  begin 
to  contract,  indicating  that  business  is  decreasing,  so 
that  there  is  more  than  money  enough  on  hand  to 
finance  the  existing  volume  of  trade.  But  under  our 
present  laws  contraction  of  currency  is  difficult  and 
unused  money  is  likely  to  accumulate  in  bank  vaults, 
thus  helping  materially  to  reduce  interest  rates 
later  on. 

A  quiet  withdrawal  of  national  bank  notes  from 
circulation  indicates  a  falling  off  in  business,  and  a 
consequent  calling  in  of  some  of  the  banks’  idle 
circulation. 

How  labor  is  affected. — Before  a  reduction  in 
wages  comes  first  a  cessation  of  overtime  work; 
then,  employment  in  certain  lines  not  being  so 
steady,  work  gradually  ceases  to  demand  the  laborer, 
leaving  him  to  seek  work  with  increasing  difficulty, 
until  finally  many  are  not  working  full  time  or  are 
even  idle. 

Better  demand  for  bonds. — A  better  demand  at 
this  time  for  bonds  sold  over  the  bankers’  counters, 
with  stocks  falling,  shows  the  early  stages  of  a 
development  of  fear  on  the  part  of  the  public.  This 
demand  grows  as  the  feeling  spreads.  The  public 
are  looking  for  securities  bearing  a  fixed  income, 
fearing  a  reduction  in  stock  dividends. 

Surplus  stocks — empty  cars — economies. — A  sur¬ 
plus  of  iron  and  copper  stocks  on  hand  occurs,  fol¬ 
lowed  by  an  overproduction  in  other  lines,  due 
partly  to  excessive  development  of  manufacturing 


130 


HOW  TO  FORECAST 


facilities  and  partl}r  to  lessening  demand.  Empty 
freight  cars  and  an  excess  of  locomotives  are  now 
noticed,  and  a  practicing  of  economies,  heretofore 
disregarded  in  the  rush  of  boom  times,  takes  place. 

Jobber  and  wholesaler  affected  after  manufacturer. 
— The  jobber  and  the  wholesaler  may  yet  be  doing 
a  fair  business,  while  the  manufacturer  who  has 
overproduced  is  worrying  over  the  surplus  left  on 
his  hands;  but  the  former  classes  enjoy  this  im¬ 
munity  for  a  short  time  only. 

Merchants  not  discounting  paper. — Fewer  mer¬ 
chants  are  now  discounting  their  paper  or  taking 
advantage  of  cash  discounts.  This  indicates  a  short¬ 
age  of  money  and  poorer  collections. 

Orders  cancelled. — Cancellation  of  manufacturers’ 
orders  is  a  sign  of  fast  approaching  trouble.  It  is 
likely  to  occur  first  in  railroad  and  then  in  indus¬ 
trial  orders. 

Extent  of  liquidation. — Liquidation  must  proceed 
so  far  that  bank  surpluses  become  excessive,  and 
interest  rates  correspondingly  low,  before  the  proc¬ 
ess  is  at  an  end. 

Railroads  pay  up  short  time  notes. — Railroads 
now,  because  of  their  increased  borrowing  capacity, 
are  enabled  gradually  to  pay  up  their  short  time 
notes,  replacing  them  with  long  time  bonds.  This 
allows  them  to  make  absolutely  necessary  repairs 
and  to  settle  long  standing  obligations,  and  to  that 
extent  they  help  out  the  business  community  in 
general. 

Small  bills  return  to  banks. — Lessening  activity 
always  releases  small  bills  from  the  tills  and  pocket 
books  of  the  middle  and  poorer  classes,  as  there  is 
less  use  for  them.  People  are  becoming  less  dis¬ 
posed  to  spend  money.  There  is,  in  consequence,  a 


BUSINESS  CONDITIONS 


131 


steady  flow  of  these  small  bills  into  the  banks  from 
all  directions. 

Surplus  product  sets  the  price. — When  overpro¬ 
duction  sets  in  the  surplus  product  exercises  an 
unduly  potent  influence  in  establishing  the  price  for 
the  entire  output.  Overproduction  finally  forces  not 
only  a  price  but  later  a  wage  readjustment.  Lower 
prices  are  necessary  so  as  to  dispose  of  the  excess 
by  enlarging  the  market,  and  prices  must  eventually 
fall  sufficiently  to  allow  this  to  be  done. 

First  year  of  decline. — During  the  first  year  of  the 
decline  the  volume  of  business  still  remains  large 
(unless  a  stringency  panic  occurs  to  hasten  matters) 
but  the  results  ate  not  satisfactory.  The  margin  of 
profit  has  been  decreased,  the  demand  greatly  less¬ 
ened,  consequently  there  has  not  been  the  usual 
addition  to  the  wealth  of  the  country.  Also  plenty 
of  money  and  easy  credit  beget  speculation  in  com¬ 
modities,  as  wheat,  corn,  cotton,  etc.  This  induces 
owners  to  hold  for  higher  prices;  while  at  the  same 
time  increasing  bank  clearings  considerably.  During 
the  earlier  half  of  the  year,  also,  the  adverse  showing 
is  delayed  by  the  filling  of  old  orders,  which  were 
taken  at  profitable  rates. 

Labor  last  reduced.-— The  liquidation  must  be  quite 
extensive  before  the  great  body  of  employers  dis¬ 
charge  hands  or  reduce  wages,  especially  the  latter. 
They  do  not  start  doing  so,  in  most  cases,  until 
fairly  forced  to,  although  when  the  movement  is 
once  under  way  many  who  are  really  making  fair 
profits  seize  this  opportunity  to  add  to  them  by  this 
means. 

Manufacturers  hold  back  orders. — Manufacturers, 
taking  their  cue  from  those  who  purchase  of  them, 
now  hold  back  their  orders  for  raw  materials  and 


HOW  TO  FORECAST 


[32 


labor  until  the  last  moment,  hoping  to  buy  cheaper, 
and  making  a  saving  in  the  item  of  interest,  which, 
to  one  who  carries  a  large  stock,  amounts  to  consid¬ 
erable  at  the  end  of  the  year,  especially  during  a 
period  when  small  savings  have  to  be  enforced. 

Liquidation  greater  in  a  presidential  year. — If  this 
liquidation  occurs  in  a  presidential  year  it  is  apt  to 
be  more  intense,  owing  to  the  uncertainty  as  to  what 
policies  are  to  be  enforced  in  the  future.  A  political 
campaign  interferes  more  or  less  with  business, 
especially  if  currency  or  tariff  issues  are  prominent. 

Gold  is  exported. — When  liquidation  is  fully  under 
way  gold  is  exported  to  Europe  to  pay  our  outstand¬ 
ing  debts  there,  and  money  later  flows  from  the 
West  to  the  East,  attracted  by  the  interest  offered  by 
the  New  York  city  banks. 

Stocks  continue  to  fall. — Even  before  the  city  real 
estate  boom  throughout  the  country  commences  to 
wane,  and  before  commodity  prices  have  fallen  seri¬ 
ously,  a  steady  decline  in  stock  values  has  been  in 
progress,  which  no  manipulation  can  withstand. 
Later,  many  of  the  minor  promoters  and  speculators 
desert  the  Street,  where  there  is  now  very  little  to 
be  made  on  either  the  bull  or  the  bear  side  of  the 
market,  and  some  of  them  promote  new  industrials, 
such  as  light  and  power  companies,  city  railways, 
and  other  lines  of  business,  trying  to  enact  there  the 
same  role  they  did  in  Wall  Street. 

Why  there  are  no  great  bull  leaders. — The  reason 
there  are  no  great  leaders  to  engineer  bull  cam¬ 
paigns  from  now  on  is  because  so  many  of  the  old 
leaders  have  left  the  street,  and  those  that  remain 
have  either  suffered  severe  losses  or  else  are  over¬ 
loaded  with  stocks.  They  cannot  do  the  one  thing 
necessary  to  raise  prices,  viz.,  buy  continuously,  and 


BUSINESS  CONDITIONS 


133 


the  public  will  not  help  them  out,  as  it  never  pur¬ 
chases  on  a  stagnant  or  falling  market. 

Most  news  now  depressing. — On  a  receding  stock 
market  the  news  received,  and  most  of  the  unex¬ 
pected  events  that  occur  from  time  to  time  are  of 
an  unpleasant  nature.  The  fears  of  the  traders 
magnify  bearish  items,  and  so  accustomed  are  their 
minds  to  depressing  news,  that  they  become  incap¬ 
able  of  fully  appreciating  good  news  when  it  comes. 

Friction  between  railroads. — Owing  to  keen  com¬ 
petition,  a  great  deal  is  heard  of  friction,  strife  and 
ill-will  among  powerful  railroad  interests,  especially 
in  the  West  where  most  of  the  new  mileage  is,  and 
where  pool  agreements  and  rate  associations  are  at 
this  time  apt  to  go  for  naught.  This  factor,  how¬ 
ever,  is  lessening  of  late  years  because  of  the  many 
mergers  that  have  taken  place  and  because  experi¬ 
ence  has  shown  that  it  has  been  ruinous  in  the  past 

Early  signs  of  decline  in  realty. — One  of  the  early 
signs  of  a  decline  in  the  real  estate  movement  is  a 
temporary  increase  in  bank  surpluses  in  the  locality 
of  the  boom.  This  shows  that  less  money  and  credit 
are  being  used  in  the  real  estate  movement.  Real 
estate,  unlike  stocks,  has  no  bears  to  sell  it  short 
and  so  lessen  the  force  of  the  reaction.  It  lacks,  in 
great  measure,  that  essential  element  of  value — easy 
convertibility;  and  hence  the  liquidating  process  is 
a  very  slow  and  tedious  one  and  at  great  loss  to 
the  owner. 

Money  withdrawn  from  trade. — Muck  capital  is 
now  withdrawn  from  unprofitable  trade  channels. 
The  strongest  houses  are  left  in  control  of  the 
greatly  lessened  markets,  and  money  accumulates  in 
banking  centers.  Nevertheless,  a  large  expense  ac¬ 
count  (greatly  increased  in  boom  times),  greed  for 


134 


HOW  TO  FORECAST 


money,  an  innate  love  of  doing,  and  ignorance  of 
conditions  keep  many  active  in  business  and  specu¬ 
lative  operations,  when  prudence  should  whisper  cau¬ 
tion  and  at  times  even  inaction.  Some  are  now 
driven  into  speculative  lines  because  of  lessened 
profits  or  even  losses  in  their  regular  business,  and 
so  incur  an  indebtedness  which  weighs  heavily  upon 
them  later  on. 

Falling  prices  and  interest  rates. — As  falling  prices 

always  diminish  profits  or  even  inflict  a  loss,  there  is 
no  inducement  for  capital  to  seek  investment,  and 
it  is  allowed  to  remain  idle  in  the  banks  at  a  loss  of 
interest  to  the  owner.  As  interest  rates  fall,  the 
value  of  all  securities  which  bear  a  fixed  rate  of 
interest  rises,  also  of  all  properties  which  pay  a 
higher  return. 

Inducements  offered  for  trade. — When  commer¬ 
cial  and  industrial  affairs  are  growing  duller  and 
competition  most  active,  finally,  to  induce  purchases, 
extended  credit  facilities  are  offered  by  sellers  to 
their  customers,  and  to  a  much  greater  extent  than 
is  prudent  or  safe.  Eventually  this  results  in  a 
large  indebtedness  among  the  merchant  class.  This 
has  an  important  effect  in  bringing  on  the  panic. 
Such  indebtedness  bears  particularly  hard  on  the 
small  dealer  and  also  leads  to  excessive  loans  by 
the  banks  to  help  out  their  clients.  It  tends  to  keep 
interest  too  high  and  cuts  down  profits,  and  so  has 
a  bad  effect  on  the  business  situation.  We  conse¬ 
quently  find  this  condition  reflected  in  the  failure 
list  by  a  gradually  increasing  number,  with  smaller 
liabilities.  The  small  manufacturer  feels  the  effect 
first  and  the  small  trader  soon  after. 

Outside  ventures  turned  into  cash. — As  the  liquida¬ 
tion  proceeds  many  business  men  turn  their  outside 


BUSINESS  CONDITIONS 


135 


ventures  and  miscellaneous  assets  into  cash  and 
strengthen  their  bank  accounts,  and  so  fortify  their 
business  relations. 

Another  trust  forming  period. — We  are  now  about 
to  enter  a  second  trust  forming  period,  when  divers 
and  often  warring  interests  are  consolidated  into 
trusts,  in  order  to  reduce  the  cost  of  production 
and  of  doing  business,  by  reason  of  larger  sales 
and  greater  capital,  to  make  a  living  profit  by  the 
practice  of  wholesale  economies,  and  to  put  a  stop 
to  ruinous  rivalry.  These  combines  are  defensive  in 
character,  giving  weak  concerns  the  strength  to 
successfully  resist  competition;  whereas  in  prosper¬ 
ous  times  trusts  were  formed  mainly  to  control  the 
market  and  were  often  of  an  aggressive  character, 
sometimes  working  harm  to  their  competitors  and  to 
the  purchasing  public. 

Fear  begins. — Just  as  on  a  rising  market  every  one 
is  hopeful,  so  on  a  falling  market  fear  is  quietly 
generated,  and  increases  as  time  passes  and  values 
continue  to  fall.  Fear  gradually  exhausts  what  we 
might  call  the  staying  power  of  the  people,  as  well 
as  their  financial  resources,  and  eventually  ends  in 
collapse. 

Farmers  hold  crops. — As  falling  prices  extend  to 
farm  products,  there  is  a  disposition  on  the  farmer’s 
part  to  hold  his  crops  for  a  time  in  the  hope  of  better 
prices.  This  reacts  on  many  lines  of  trade — dimin¬ 
ishes  sales  and  makes  collections  slower. 

Speculators  worst  hit. — Falling  values  naturally 
have  the  most  immediate  and  greatest  effect  on  those 
doing  a  credit  business,  and  among  these  the  specu¬ 
lative  fraternity  are  the  least  able  to  stand  a  depres¬ 
sion;  hence  it  is  at  first  in  their  ranks  that  the 
largest  percentage  of  failures  occur.  There  is  also 


13  6 


HOW  TO  FORECAST 


always  a  large  number  of  merchants  who  venture 
everything  on  narrow  margins,  and  good  times  only, 
when  all  conditions  are  favorable,  can  keep  them 
afloat.  These  are  apt  to  fail  when  any  severe  and 
prolonged  strain  is  put  on  the  finances  of  the 
country. 

Europe  buys  American  investments. — As  the  times 
become  poorer  in  European  countries  and  idle 
money  fills  their  banks,  they  are  disposed  to  invest 
in  gilt-edged  American  securities,  as  they  pay  a  bet¬ 
ter  rate  of  interest  than  foreign  securities — unless 
they  are  afraid  of  our  financial  condition  at  the  time. 

Imports  larger  than  expected. — On  the  present  de¬ 
clining  market  imports  are  apt  to  decrease  slower 
than  one  would  expect  (with  only  a  temporary  de¬ 
cline  if  a  money  stringency  occurs).  This  is  because 
previous  high  prices  have  attracted  goods  here  from 
all  over  the  world  and  it  is  difficult  to  change  the 
inflowing  tide  so  suddenly;  also  many  of  the  goods 
were  ordered  months  before,  and  as  European  mar¬ 
kets  also  are  falling  foreigners  are  anxious  to  realize 
on  their  wares.  They  may  even  send  goods  here  to 
be  sold  on  commission,  knowing  that  their  own 
market  is  very  poor,  but  not  realizing  at  first  how 
seriously  and  permanently  ours  is  affected  as  well. 

Also,  many  Americans  who  buy  foreign  goods  do 
not  at  first  realize  how  serious  the  situation  is,  but 
imagine  that  it  will  soon  change  for  the  better,  and 
so  continue  their  purchases.  They  thus  avoid  for 
the  time  being  the  discomfort  and  humiliation  at¬ 
tending  a  serious  curtailing  of  their  expenses,  with 
consequent  loss  of  social  prestige. 

Capital  timid. — When  capital  is  hampered  by  un¬ 
certainty  as  to  the  future,  that  condition  operates  as 
a  check  on  all  business  operations  and  prevents  the 


BUSINESS  CONDITIONS 


137 


capitalist  from  placing  his  money  out  on  anything 
like  a  long  time  engagement,  when  events  beyond 
his  control  might  intervene  to  cause  him  an  ulti¬ 
mate  loss.  He  prefers  to  take  a  lower  rate  of  inter¬ 
est  and  place  his  capital  where  it  is  absolutely  safe. 

Business  large,  profits  small. — While  during  this 
period  and  before  the  commercial  crisis  there  are 
years  when  the  volume  of  business  is  large  and  the 
situation  looks  more  cheerful,  yet  on  close  investiga¬ 
tion  it  will  be  found  that  appearances  are  very 
deceiving;  that  the  risks  of  business  have  been  in¬ 
creasing  and  the  percentage  of  profits  quietly  de¬ 
creasing.  Appearances,  therefore,  are  at  times  semi- 
prosperous,  yet  real  prosperity  is  not  attained.  In 
fact,  some  countrjr  store-keepers  find  business  so 
unprofitable,  owing  to  the  double  loss,  as  it  were, 
entailed  first  by  excessive  competition  and  second 
by  falling  values,  that  they  offer  to  exchange  their 
stocks  for  realty,  in  the  hope  of  bettering  their 
condition. 

Weaker  companies  pass  dividends.— The  first  com¬ 
panies  to  reduce  or  pass  dividends  or  to  pay  in  script 
are  the  weaker  ones,  whose  credit  in  the  money 
market  is  poor,  and  who  therefore  at  this  time  are 
often  unable  to  secure  funds  to  pay  expenses  in¬ 
curred  or  to  be  incurred. 

Why  imports  lessen.— When  prices  go  so  low  that 
the  addition  of  freight  and  tariff  to  cost  makes  it 
unprofitable  for  foreigners  to  sell  goods  in  America, 
imports  lesssen  and  our  manufacturers  reap  the 
benefit. 

Exports  increasing.— The  ratio  of  exports  to  im¬ 
ports  now  begins  to  increase,  as  manufacturers  are 
prepared,  by  reason  of  their  improved  plants,  less¬ 
ened  charges  for  interest,  raw  material  and  labor. 


138 


HOW  TO  FORECAST 


and  new  economies  practiced,  to  manufacture  goods 
at  less  cost  than  heretofore.*  Prices  must  eventu¬ 
ally  go  low  enough  to  allow  us  to  compete  with  the 
world’s  products  and  so  finally  to  pay  our  debts 
abroad. 

Emigration  East  to  West.— A  quiet  flow  of  emi¬ 
gration  from  the  overcrowded  East  to  the  partially 
settled  West,  with  its  greater  opportunities,  is  one 
of  the  results  of  the  liquidation  in  operation  during 
this  period.  Also,  much  Eastern  capital  goes  West 
in  search  of  greater  activity,  where  interest  rates 
are  higher  and  profits  more  promising. 


*  'Burton  on  Crises,  p.  89. 


XII.— In  tlie  Shadow  of  the  Pam 


ic 


[Note — These  conditions  last  prevailed  in *  1892.  They 
may  naturally  he  expected  to  recur  about  1912.] 

THE  entire  period  of  liquidation  up  to  the 
time  of  the  panic  averages  about  six  years 
or  thereabouts.  It  was  so  from  1887  to 
1893  and  from  1867  to  1873.  We  are  now- 
arrived,  in  this  chapter,  at  a  period  about  one  year 
before  the  coming  panic,  when  the  shadow  of  what 
is  to  come  may  be  seen  by  the  student  of  finance; 
for  all  great  events  are  preceded  by  warnings  legi¬ 
ble  to  those  who  can  read.  We  are  about  to  decipher 
these  signs  down  to  the  time  of  the  panic. 

A  brief  summary  of  the  past.- — In  forecasting  the 
future  we  must  remember  that  each  new  year  is  the 
product  of  the  years  preceding  it,  and  to  appreciate 
what  is  coming  we  will  briefly  summarize  the  past. 

“First  comes  an  ascending  wave  of  activity  and 
rising  prices,  then  prices  reach  a  point  that  checks 
demand,  then  comes  a  period  of  hesitation  and  cau¬ 
tion..  then  contraction  by  lenders  and  discounters 
and  temporary  exhaustion  of  liquid  capital,  next  a 
weakening  of  values,  and  then  holders  simultane¬ 
ously  endeavor  to  realize,  and  so  accelerate  a  general 


140 


HOW  TO  FORECAST 


fall  in  prices  of  stocks  and  commodities.”  Credit 
in  business  lines  becomes  more  sensitive  and  is 
contracted,  transactions  are  diminished,  losses  are 
incurred  through  keen  competition  and  depreciation 
in  values,  and  finally  the  ordeal  becomes  so  severe 
upon  the  debtor  class  that  forcible  liquidation  has 
to  be  resorted  to,  and  insolvent  firms  and  institu¬ 
tions  must  be  wound  up,  to  begin  anew  later  on 
perhaps. 

Events  before  a  panic. — Small  profits  and  declin¬ 
ing  wages  and  credits  continue  for  several  years 
before  a  commercial  panic,  together  with  increasing 
losses  by  reason  of  bad  debts,  and  finally  a  gradual 
decrease  in  activity  and  production.  This  latter 
entails  the  heaviest  loss  on  the  manufacturer,  as  he 
not  only  receives  less  for  his  product,  but  by  reason 
of  his  not  producing  to  the  limit  of  his  capacity  his 
goods  are  costing  him  more.  This  situation  doubly 
impairs  the  profits  of  his  business,  and  throws  many 
of  the  smaller  manufacturers  into  bankruptcy. 

Lessened  activity  in  other  countries. — Diminishing 
activity  and  purchasing  power  in  other  countries 
also,  generally  precede  a  commercial  panic  here. 

Panics  in  some  foreign  countries. — Panics  in  some 
other  countries  generally  occur  within  a  year  of  the 
panic  in  ours.  They  more  often  precede  ours  by  a 
year.  This  is  because  of  the  intimate  relations  ex¬ 
isting  between  all  countries,  through  the  telegraph 
and  cheap  and  rapid  transportation,  making,  as  it 
were,  of  all  modern  nations  one  big  family.  For¬ 
merly  a  panic  was  likely  to  be  limited  to  the  country 
where  the  famine  or  war  that  brought  it  on  occurred. 

Signs  of  panic  years.— In  panic  years  bank  loans 
and  discounts  reach  a  maximum  and  specie  a  mini¬ 
mum.  There  is  a  general  drawing  in,  a  tendency  to 


BUSINESS  CONDITIONS 


141 


touch  nothing  speculative,  and  collections  are  slower 
and  grow  harder  as  the  panic  approaches. 

Insufficient  money  not  cause  of  panic. — An  insuffi¬ 
cient  amount  of  money  in  circulation  is  not  the 
cause  of  the  extended  distress,  for  at  this  time  prices 
fall  rapidly  and  much  money  has  been  released  from 
various  undertakings,  but  is  jealously  hoarded.  Later 
on,  after  the  panic,  interest  rates  become  very  low. 
This  is  as  much  due  to  lack  of  confidence  in  the 
times  and  the  borrowers  as  to  losses  in  the  imme¬ 
diate  past. 

Banks  have  often  helped  on  panic. — When  we 
realize  that  the  bank  is  the  headquarters  for  money 
and  credits,  that  the  banks  in  the  United  States 
have  all  had  to  learn  their  business  in  a  compara¬ 
tively  short  period,  and  that  many  to-day  who 
branch  out  as  bankers  are  utterly  ignorant  of  the 
business  or  perhaps  are  speculators  who  have  organ¬ 
ized  a  bank  for  their  own  purposes,  we  are  not  sur¬ 
prised  that  some  of  them  have  at  times  been  promi¬ 
nent  factors  in  creating  a  panic.  They  have  often 
solicited  deposits  from  the  people  and  then  placed 
these  deposits  where  they  could  not  be  had  when 
the  people  wanted  them.  They  have  sometimes 
boomed  stocks  beyond  reason,  and  then,  becoming 
frightened,  have  suddenly  withdrawn  credit  to  an 
extent  disastrous  to  business.  They  have  at  times 
issued  excessive  credits  and  wild-cat  currency.  Some 
bankers  regard  their  banks  as  mints  to  issue  un¬ 
limited  currency  and  credits  for  their  own  benefit, 
instead  of  as  intended  to  assist  trade  with  judicious 
loans.  Sometimes,  after  the  banker  has  fostered 
speculation,  he  has  been  the  first,  later  on,  to  hoard 
cash  in  order  to  save  the  bank. 

These  dangerous  features,  however,  are  gradually 


142 


HOW  TO  FORECAST 


disappearing.  The  number  and  influence  of  con¬ 
servative  bankers  has  been  growing  rapidly  of  late 
years,  as  the  experimental  stage  of  American  bank¬ 
ing  passes,  and  eventually  they  will  doubtless  in 
great  measure  do  away  with  excessive  speculation. 

Banks  feel  the  money  drain  first. — Banks,  being 
the  depositories  of  ready  money,  which  is  so  much 
desired  when  distrust  sets  in,  are  the  first  to  feel 
the  drain.  Especially  is  this  true  of  savings  banks, 
which  first  show  a  deposit  shrinkage  (generally  one 
to  two  years  before  a  commercial  panic),  because 
they  have  a  class  of  depositors  who  are  more  easily 
influenced  by  fear,  and  whose  needs,  also,  are  the 
greatest,  as  their  entire  income  depends,  in  most 
cases,  on  wages,  and  these  are  reduced,  or  in  some 
cases  stopped  altogether.  They  have  to  fall  back  on 
the  only  resources  left  them,  their  savings  bank  de¬ 
posits.  The  business  man  whose  capital  has  been 
impaired  through  losses  is  now  found  anxiously  so¬ 
liciting  loans  of  the  commercial  banks  and  so  reduc¬ 
ing  greatly  their  balances. 

Inflationists  active. — Both  before  and  after  a  panic, 
inflationists  are  apt  to  busy  themselves  trying  to 
save  the  nation  with  their  quack  nostrums.  It  was 
the  greenbacker  in  1873,  and  the  silverite  in  1884  and 
1893.  A  large  number  of  people  always  think  that 
money  is  the  panacea,  and  often  at  the  very  time 
when  the  banks  are  loaded  down  with  it. 

Strikes. — Serious  strikes  begin  about  two  years 
before  the  commercial  panic  and  this  condition 
grows  worse  until  some  time  after  the  panic  is  over. 
Continued  depression  at  last  shows  the  strikers 
finally  the  hopelessness  of  their  efforts  at  this  time, 
when  there  are  so  many  workmen  idle  who  stand 
ready  to  take  the  strikers’  places. 


BUSINESS  CONDITIONS 


143 


Trade  unions  lose  members. — Failing  times  bring 
into  operation  among  trade  unionists  the  greed,  self- 
interest  and  necesssities  of  the  individual,  as  against 
the  demands  of  his  union,  and  if  the  depression  is 
great  and  long  continued,  vast  numbers  will  desert 
the  unions  and  look  after  their  own  individual  inter¬ 
ests.  Also,  the  payment  of  the  dues  grows  burden¬ 
some. 

Radical  changes  proposed. — Radical  changes  in 
fiscal  or  economic  policies  are  often  proposed  as  a 
remedy  for  stringent  money  conditions.  Such  pro¬ 
posals  at  this  time  serve  only  to  intensify  existing 
evils  and  render  them  still  more  acute. 

Excess  of  imports  a  bad  feature. — A  continued 
excess  of  imports  over  exports,  in  a  debtor  country 
like  the  United  States,  indicates  danger  ahead.  We 
cannot  continue  permanently  to  buy  more  than  we 
sell.  (In  a  creditor  country  this  feature  has  not  the 
same  significance.  See  Burton  on  Crises,  p.  201.) 
The  decrease  in  imports  is  compulsory  and  is  due 
to  diminished  consumption  or  purchasing  power. 

Wall  Street’s  wealth  is  promises. — The  wealth  of 
Wall  Street,  its  bonds,  its  stocks  and  commercial 
paper,  consists  of  promises  to  pay,  or  shares  in 
prospective  profits.  Raise  a  doubt  as  to  the  solvency 
of  these  promises  and  you  upset  the  financial,  com¬ 
mercial  and  industrial  world.  Wall  Street  is  the 
headquarters  of  all  this  wealth  and  of  ready  money 
as  well,  and  it  forms,  therefore,  the  nerve  center  of 
American  business. 

Lessening  bank  reserves. — Diminishing  bank  re¬ 
serves  are  an  important  danger  signal  before  every 
panic.  The  time  comes  when  the  banks’  supply  of 
cash  gives  way  under  the  mighty  strain  put  upon  it 
by  expanded  credit.  This  always  generates  fright. 


144 


HOW  TO  FORECAST 


The  mere  fact  that  cash  is  running  low  makes  every 
one  want  it.  Prices  decline  and  paper  profits  are 
often  supplanted  by  losses.  The  seeds  of  panic  were 
planted  in  a  time  of  abundant  money  and  credit,  and 
it  is  the  withdrawal  and  destruction  of  these  that 
bring  on  the  panic. 

Money  stringencies  necessary. — The  government, 
acting  through  its  officials,  has  often  helped  to  tide 
over  a  money  stringency,  but  its  methods  have  gen¬ 
erally  been  those  of  further  inflation  which,  in  the 
end,  only  intensify  the  depression  by  furnishing  a 
basis  of  money  with  which  speculators  may  con¬ 
tinue  their  operations.  The  efforts  of  the  banks, 
also,  have  frequently  had  a  similar  effect. 

Money  stringencies,  under  present  conditions,  are 
necessary  to  restore  things  to  the  normal,  restrain¬ 
ing  overproduction  and  overtrading.  Such  condi¬ 
tions  should  be,  in  most  cases,  allowed  to  work  out 
their  natural  course.  Measures  of  relief  should  be 
temporary,  simply  to  tide  over  a  crisis  without  per¬ 
manently  inflating  the  currency. 

Effect  of  large  harvests  now. — An  abundant  har¬ 
vest  now  is  not  enough  to  avert  a  panic  except  for  a 
short  time,  even  though  foreign  harvests  are  poor; 
but  such  a  harvest  does  alleviate  the  liquidation 
afterwards,  unless  agricultural  prices  are  exception¬ 
ally  low. 

Some  producers  having  a  hard  time. — Manufac¬ 
turers  who  have  incurred  obligations  on  the  basis  of 
the  old  inflated  prices  and  have  made  investments 
which  can  be  profitable  only  on  a  high  price  level, 
are  now  forced  to  sell  goods  at  a  sacrifice,  to  con¬ 
tract  their  operations  and  to  reduce  wages  and  work¬ 
ing  time.  Others,  with  the  great  fall  in  prices  and 


BUSINESS  CONDITIONS 


145 


the  consequent  rise  in  the  value  of  money,  find 
themselves  unable  to  meet  their  obligations. 

Part  railroads  have  played. — It  was  in  1830  that 
railroads  first  appeared,  with  about  sixteen  miles 
built  at  the  end  of  that  year.  It  was  not  until  1845 
that  they  had  got  fairly  under  way  and  were  any¬ 
thing  of  a  power  in  the  business  world.  They  have 
been  the  great  developers  of  our  country,  but  have 
been  necessarily  a  disturbing  feature  as  well,  as 
any  great,  new,  untried  factor  entering  into  busi¬ 
ness  life  must  necessarily  be  at  first.  The  railroad 
had  its  excesses  to  go  through,  when  it  was  built 
far  in  advance  of  the  times,  as  in  1873.  Competitive 
building,  as  in  1884  and  before,  brought  ruinous  rate 
wars.  Railroad  conditions  helped  largely  to  bring 
about  the  panics  in  both  the  above  years.  Unjust 
discriminations  and  high  rates  were  met,  in  poor 
times,  by  granger  and  even  national  opposition,  ex¬ 
pressed  in  adverse  legislation.  The  general  legal 
status  of  the  railroad,  its  powers  and  limitations, 
had  to  be  established  by  constant  legal  strife.  At 
present  the  railroads,  like  all  other  corporations  and 
individuals,  are  forced  to  combine  their  forces  and 
capital  in  order  to  meet  the  demands  of  modern 
industrial  organization  for  the  production  of  the 
best  at  the  lowest  price  possible.  This  want  can  be 
met  only  by  large  capital  doing  a  large  business  on 
a  basis  of  small  profits.  This  principle  is  often 
reduced  to  such  a  fine  point  that  economies  in  oper¬ 
ation  and  the  saving  of  former  waste,  pay  the  profits 
demanded  by  capital. 

Corporations  necessary.— The  fact  that  corpora¬ 
tions  sometimes  abuse  their  powers  is  no  argument 
against  their  existence.  They  represent  the  cheapest 
form  of  production  and  distribution.  Errors  that 


146 


HOW  TO  FORECAST 


grow  up  may  be  remedied  by  legislation  and  by 
public  opinion,  but  lawmakers  should  be  careful  not 
to  so  handicap  corporations  as  to  impair  their  utility. 

Fear  grows  greater. — Gradually  the  public  begins 
to  realize  that  the  country  has  been  deluded  with  all 
sorts  and  varieties  of  paper  evidences  of  indebtedness 
or  ownership,  in  the  shape  of  bonds,  stocks,  con¬ 
struction  companies’  notes,  etc.,  while  extravagance 
and  speculation  have  crept  into  all  lines  of  business 
and  into  private  life.  It  takes  time  for  the  people  to 
realize  this,  but  with  diminishing  profits  and  a  less¬ 
ening  volume  of  business,  the  consciousness  finally 
comes  home  to  them  and  the  feeling  of  fear  grows 
greater  and  greater.  “The  year  before  a  [commer¬ 
cial]  panic  is  apt  to  be  one  of  apprehension  and 
stringency  in  the  money  market;  rapid  fluctuations 
on  ’change  and  a  downward  tendency  in  stocks;  a 
year  of  poor  business  in  all  lines,  a  foreshadowing, 
as  it  were,  of  what  is  to  come.” 

On  a  declining  market  the  fear  that  an  evil  may 
materialize  is  very  effective,  whereas  on  a  rising 
market  it  is  lightly  tossed  aside.  The  seeds  of  fear 
germinate  best  where  the  soil  has  been  properly 
prepared. 

The  people  become  restless. — The  sale  of  luxuries 
falls  off  first,  then  “necessary  luxuries,”  so  called, 
and  finally  necessaries.  It  is  at  the  latter  stage, 
when  wages  have  been  reduced  that  the  masses  be¬ 
come  discontented  and  all  sorts  of  panaceas  are 
freely  aired  on  the  political  platform.  Ill-advised 
laws  are  in  danger  of  passage  and  the  more  turbulent 
at  times  indulge  in  violence.  It  is  a  hard  thing  for 
most  people,  and  an  impossible  thing  for  some,  to 
practice  close  economy  and  patience,  especially  if  on 
an  empty  stomach.  This  unrest  extends  to  all  the 


BUSINESS  CONDITIONS 


147 


peoples  of  the  civilized  world.  They  want  greater 
political  freedom,  and  if  the  government  is  an  auto¬ 
cratic  one  the  outlook  frequently  becomes  serious. 
Governments  have  often  in  the  past  hinted  vaguely 
at  great  dangers  surrounding  the  nation,  in  order  to 
secure  from  the  people  the  desired  appropriations  or 
to  divert  their  attention  for  the  time  being. 

Call  for  cash  shows  up  weak  institutions. — The 
constant  call  for  cash  during  this  year  is  apt  to 
show  up  to  bad  advantage  many  of  our  financial 
institutions  that  may  have  indulged  in  outside  ven¬ 
tures,  or  that  have  been  ruined  by  some  one  of  their 
officials.  This  year  of  depression,  on  the  other  hand, 
is  not  without  its  benefits,  as  it  stops  all  branching 
out  and  enables  many  to  curtail  their  purchases  and 
operations  and  reduce  their  indebtedness,  the  burden 
of  which  is  now  felt  heavily.* 

Government  bonds  in  favor. — At  these  times 
banks,  trust  companies  and  insurance  companies 
buy  United  States  Government  bonds,  not  only  be¬ 
cause  they  are  the  safest  investment,  but  also  be¬ 
cause  no  other  class  of  investment  could  so  effectu¬ 
ally  strengthen  their  position,  or  be  so  relied  upon 
for  immediate  use  in  raising  money  when  suddenly 
needed. 

Credits  shrink — Credits  continually  shrink  as 
losses  are  made  and  dishonorable  methods  exposed 
in  business  life.  Fear  spreads  throughout  financial 
circles  and  money  is  gradually  hoarded,  until  finally 
conditions  are  ripe  for  the  panic. 

Immigration. — During  the  period  of  depression 
that  precedes  the  commercial  panic  the  immigration 
question  becomes  one  of  the  important  features  of 
the  day,  and  is  pretty  sure  to  be  embodied  in  some 


*  See  Financial  Chronicle,  Jan.  24,  1874. 


148 


HOW  TO  FORECAST 


form  in  the  political  platform  of  either  or  both  par¬ 
ties.  The  unemployed  are  naturally  jealous  of  alien 
competition,  and  as  the  times  grow  harder,  they 
demand  the  abrogation  or  modification  of  existing 
laws  on  this  subject,  making  it  harder  for  the  for¬ 
eigner  to  enter  the  country. 

Western  banks  feel  strain.— The  great  demand  for 
money  prior  to  a  commercial  panic  and  the  conse¬ 
quent  strain  on  the  banks,  the  custodians  of  money, 
is  felt  severely  out  West  among  the  new  banks, 
whose  methods  of  business  are  new  and  more  or 
less  untried  and  have  often  not  been  of  the  best.  As 
these  banks  now  begin  to  fail  confidence  is  still 
more  shaken  in  the  business  centers. 

Narrow  stock  market. — At  this  period  most  of  the 
business  on  the  stock  exchange  is  represented  by 
half  a  dozen  favorite  issues,  which  are  manipulated 
by  professionals.  The  public  are  not  interested. 

Bank  no  stronger  than  its  securities. — A  bank  is 
no  stronger  than  the  securities  which  back  it  up,  so 
that  when  doubt  sets  in  as  to  the  solidity  of  these, 
it  is  apt  to  extend  to  the  bank  that  holds  them. 

Loan  increase. — A  steady,  long  continued  increase 
in  bank  loans  occurs  at  about  this  time.  It  is  espe¬ 
cially  serious  if  attended  by  a  scarcity  of  specie,  and 
at  the  same  time  by  diminishing  prices.  The  scarcity 
of  metallic  money  is  in  part  a  result  of  gold  exports. 
Gold  is  going  abroad  to  pay  debts,  as  foreigners  are 
worried,  and  specie  is  the  only  money  accepted 
abroad  for  our  debts  and  in  payment  for  the  stocks 
which  foreigners  are  now  sending  back  to  us  (as 
before  1857,  1873  and  1893).  Shrinkage  in  bank  re¬ 
serves  and  increase  in  liabilities  is  an  important 
feature  foreshadowing  a  coming  panic  at  this  time. 

Call  and  time  money.— Call  money  very  low  and 


BUSINESS  CONDITIONS 


149 


time  money  correspondingly  high  and  scarce,  indi¬ 
cates  fear  on  the  part  of  lenders. 

Increase  in  paper  money  over  specie. — An  unusual 
increase  in  the  percentage  of  paper  money  to  specie 
occurs  in  panic  years,  not  only  because  foreigners 
accept  only  specie  in  payment,  but  also  because  gold 
is  the  favorite  form  of  money  for  hoarding. 

Great  demand  for  money. — When  many  are,  as 
now,  trying  to  get  on  as  near  a  cash  basis  as  possible 
in  order  to  be  safe,  the  demand  for  money  becomes 
at  times  very  great  and  is  quickly  reflected  in  the 
stock  exchange,  where  the  fluctuations  are  rapid, 
causing  sharp  declines  in  stock  values,  sometimes 
verging  on  panic. 

Commodities  accumulate. — As  the  panic  comes 
nearer,  commodities  which  formerly  found  ready 
consumption,  even  though  at  reduced  prices,  how 
accumulate  in  manufacturers’  hands.  In  some  lines 
auction  sales  are  inaugurated  in  order  to  get  rid  of 
them,  and  many  are  exported,  but  still  the  accumu¬ 
lation  goes  on  and  the  demand  quietly  lessens. 

Events  preceding  panic. — Falling  prices,  lack  of 
work,  small  or  no  profits  or  even  losses,  declining 
wages;  lessened  credits,  stagnation  in  stock,  com¬ 
mercial  and  industrial  circles,  stringent  money  mar¬ 
kets,  high  interest  rates;  lack  of  confidence,  rumors 
of  business  troubles,  gradually  becoming  more  defi¬ 
nite,  and  increasing  failures,  all  precede  a  great  com¬ 
mercial  panic.  As  conditions  grow  more  acute, 
rumors  are  afloat  in  regard  to  solvent  and  insolvent 
firms  alike,  sometimes  even  the  greatest  names  in 
the  business  and  banking  world. 

Low  prices  for  agricultural  products. — The  low 
prices  for  cur  agricultural  products  that  generally 
come  at  panic  periods  when  all  values  are  falling,  not 


150 


HOW  TO  FORECAST 


only  reduce  the  debt-paying  power  of  the  producers 
but  the  money  value  of  our  exports  as  well,  and  so 
act  doubly  to  intensify  the  bad  times. 

Bonds  go  down. — Bonds  steadily  decline  just  be¬ 
fore  a  panic  while  stocks  may  fluctuate.  This  is 
because  banks,  trust  companies,  etc.,  have  constantly 
to  sell  bonds  to  get  funds  to  meet  the  demands  of 
their  customers,  while  stocks  are  more  subject  to 
speculative  influences. 

Foreign  exchange  high. — If  foreign  exchange  is 
high  at  this  time,  it  indicates  that  Europe  is  absorb¬ 
ing  our  gold,  or  that  exports  are  small,  or  both. 

Decrease  in  deposits.— There  is  a  decrease  in  de¬ 
posits  just  before  a  panic.  This  decrease  would  of 
course  be  much  larger  if  all  deposits  consisted  of 
cash,  as  in  the  early  days  of  banking;  modern  de¬ 
posits  mostly  represent  mere  bank  credits,  and  these 
are  often  increased  before  a  panic  by  reason  of 
loans.  The  borrower  receives  his  loan  in  the  form 
of  a  check,  which  he  at  once  deposits  at  his  own 
bank. 

Talk  of  booming  stocks. — Often,  before  the  panic 
comes  on,  certain  stocks  are  heavily  manipulated 
and  there  is  talk  of  booming  them,  due  probably  to 
an  effort  on  the  part  of  those  who  are  under  the  load 
to  sell  out  at  the  last  moment. 

Cash  and  short  credits  supplant  long  credits. — 
When  the  panic  is  in  sight  cash  and  short  credits 
gradually  take  the  place  of  long  credits,  and  this 
continues  for  some  years  after  the  panic.  The  enor¬ 
mous  shrinkage  in  deposits  when  the  panic  is  on  and 
thereafter,  represents  not  only  the  actual  withdraw¬ 
als  but  also  the  fading  away  of  these  long  time 
credits  on  the  books  of  the  banks. 

Dishonest  disclosures.  —  Dishonest  disclosures 


BUSINESS  CONDITIONS 


151 


sweep  over  the  land  like  a  wave  of  crime  just  before 
and  just  after  a  panic.  This  often  represents  cor¬ 
rupt  acts  begun  some  years  back,  but  only  coming 
to  light  when  failure  takes  place. 

Gold  in  demand. — During  and  just  prior  to  a  com¬ 
mercial  panic,  so  universal  is  the  distrust  that  many 
have  lost  faith  in  everything  but  actual  cash,  gold 
generally  preferred,  “not  only  because  it  is  the 
measure  of  all  values,  but  also  for  the  reason  that 
it  is  the  only  article  in  the  market  that  i^  appreci¬ 
ating.”  Indeed,  at  this  time  the  value  of  gold,  as 
measured  by  what  it  will  buy,  is  rising  at  a  most 
rapid  rate,  whereas  everything  else  is  falling. 

Panic  started  by  banks  curtailing  credits. — The 
panic  is  precipitated  by  the  banks  curtailing  credits 
and  later  on  enforcing  payment  of  notes  and  indebt¬ 
edness  of  clients  whose  capital  for  some  time  past 
has  been  gradually  depleted,  and  who  have  made 
their  bank  borrowings  take  the  place  of  this  lost 
principal.  The  banks  finally  can  no  longer  supply 
this  demand,  because  of  the  gloomy  outlook  and 
their  own  overloaded  condition.  The  first  signal 
generally  comes  by  the  country  banks  calling  on  the 
New  York  banks  for  their  balances,  which  they  now 
need  for  their  own  protection  or  use. 

Some  large  financial  institution  first  to  fall. — The 
first  failure  before  a  panic,  which  usually  ushers  the 
panic  in  as  it  were,  is  apt  to  be  some  large  financial 
institution  with  fiduciary  features  attached,  as  a 
well  known  bank  or  trust  company.  Against  this  in¬ 
stitution  charges  of  fraud  or  speculation  are  very 
likely  to  be  made.  A  disclosure  of  this  description 
has  the  greatest  and  most  lasting  effect  when  it  re¬ 
veals  a  condition  which  may  be  more  or  less  general, 
and  is  not  a  mere  passing  incident.  This  corporation 


152 


HOW  TO  FORECAST 


is  usually  in  a  line  of  business  that  requires  ready 
money.  It  probably  has  large  sums  coming  due,  but 
it  is  made  vulnerable  by  having  deposits  that  a 
frightened  public  can  demand.  If  it  has  the  addi¬ 
tional  handicap  of  a  poor  or  speculative  reputation 
among  those  who  know  its  standing,  such  reports 
will  now  spread  rapidly,  and  thus  intensify  the  de¬ 
mand  on  it  for  cash,  and  perhaps  prevent  others 
from  coming  to  its  aid. 

Who  started  previous  panics. — “In  1873  the  panic 
was  started  by  a  banker  who  had  advanced  to  a  rail¬ 
road,  and  could  not  renew  his  notes.  In  1893  it  was 
a  railroad  which  had  bought  up  other  roads  and 
could  not  meet  its  obligations.  In  1907  it  was  a 
copper  speculator  who  got  his  bank  in  trouble  by 
trying  to  corner  a  copper  stock.”* 

Each  panic  has  its  own  features. — Each  panic  has 
some  particular  feature,  such  as  wild  land  specula¬ 
tion  in  1837;  excessive  increase  of  money  circulation 
and  wild-cat  banking  prior  to  1857;  overextension 
of  credit  in  1866-67;  inflation  of  currency  and  unwise 
building  of  railroads  into  unproductive  country  be¬ 
fore  1873;  free  silver  agitation  and  competitive  rail¬ 
road  building  in  1884;  free  silver  agitation  and  over¬ 
issue  of  silver  dollars  and  certificates  before  and 
after  1893. 

Runs  on  banks  follow. — This  failure  is  the  final 
blow  which  upsets  all  lines  of  business.  A  run  fol¬ 
lows  upon  banks  and  other  fiduciary  institutions, 
securities  are  sacrificed  first  by  the  victims  of  the 
run,  then  other  necessitous  holders  follow  suit,  and 
others  still  who  wish  to  strengthen  their  position, 
until  the  rush  to  sell  becomes  general  and  finds 


*  The  Evening  Post ,  Nov.  9,  1907. 


BUSINESS  CONDITIONS 


153 


expression  in  the  outbreak  of  panic,  when  the  public 
for  the  time  being  seem  to  have  parted  with  their 
senses  in  their  wild  rush  for  money. 


XIII.— Tke  Commercial  Panic 


[Note — These  conditions  last  occurred  in  1893,  In 
the  natural  course  of  the  20  year  cycle ,  they  would  be 
repeated  in  1913.  Of  course  there  can  be  no  certainty 
that  the  20  year  period  will  be  exact  to  the  year,  but  at 
present  writing  there  is  no  factor  in  evidence  that 
zvould  seem  likely  to  cause  any  wide  variation .] 

DEFINITION  of  panic.-— The  Century  Diction¬ 
ary  defines  panic  as  sudden  or  groundless 
fear — "an  exaggerated  alarm,  which  takes 
possession  of  a  trading  community  on  the 
occurrence  of  a  financial  crisis,  such  as  the  failure 
of  an  important  bank  or  the  exposure  of  a  great 
commercial  swindle,  inducing  a  general  feeling  of 
distrust  and  impelling  to  hasty  and  violent  measures 
to  secure  from  possible  loss,  thus  often  precipitating 
a  general  financial  disaster  which  was  at  first  only 
feared.” 

Crisis  defined.-— Crisis  is  defined  as  the  point  of 
culmination — a  critical  time — a  decisive  point.  The 
two  words  are  often  used  indiscriminately,  but  panic 
properly  refers  to  a  mental  state  and  crisis  to  an 
existing  condition;  the  one  disappears  but  the  other 


remains. 


BUSINESS  CONDITIONS 


155 


A  crisis  has  its  origin  in  the  money  market,  a  panic 
in  the  minds  of  the  people.  Either  one  may  bring 
about  the  other.  The  crisis  comes  with  the  culmina¬ 
tion  of  high  prices  and  the  panic  is  the  fierce  com¬ 
petitive  bidding  for  money  in  exchange  for  goods, 
securities,  or  credit.  A  panic  starts  with  nervous¬ 
ness  and  often  develops  into  hysteria  and  frenzy. 

Panic  results  from  inflation,  speculation  and  ex¬ 
travagance. — The  primary  or  basic  conditions  must 
be  unsound  to  beget  a  commercial  panic.  It  is  the 
natural  result  of  excessive  debt-incurring,  inflation, 
rash  speculation  and  extravagance,  which  have  at 
length  broken  down  the  credit  system. 

Some  of  the  features  leading  up  to  panic,  as  enu¬ 
merated  by  various  writers,  are  as  follows:  Turning 
liquid  capital  into  fixed  forms;  excesssive  real  estate 
inflation;  wild-cat  banking  and  too  rapid  formation 
of  new  banks;  wars;  dishonesty  and  intense  desire 
to  get  rich  quick;  too  great  a  volume  of  business  in 
proportion  to  capital;  too  long  commercial  credits, 
leading  to  speculation  instead  of  debt  paying;  un¬ 
wise  expansion  of  credits  and  circulation  by  banks, 
or  unnecessary  hoarding  of  cash  by  them  and  by  the 
people;  withdrawals  of  credits  when  the  financial  sky 
darkens;  stoppage  of  business  enterprises  caused  by 
fear  of  shortage  of  money;  too  much  borrowing  of 
capital  at  home  and  abroad;  want  of  confidence; 
contraction,  expansion  or  debasing  of  the  currency; 
extravagance,  waste  and  wild  speculation;  excessive 
importations;  overproduction  and  overdoing  in  all 
lines;  inventions  destroying  existing  values  and  tem¬ 
porarily  depriving  many  of  wages;  inflation  in  se¬ 
curity  and  commodity  values;  fraudulent  disclosures 
in  business;  railroad  and  other  stock  watering  incor¬ 
porations;  changes  of  administration  and  political 


156 


HOW  TO  FORECAST 


agitation;  excessive  building  of  railroads,  mills  and 
factories;  excessive  rise  in  prices  of  labor  and  mate¬ 
rials;  railroad  wars  and  rate  cutting,  and  price  cut¬ 
ting  in  commodities;  distrust  setting  in,  accompanied 
by  a  growing  desire  to  get  from  under  the  load  of 
debt;  excessive  output  of  gold,  causing  a  too  rapid 
enhancement  of  values. 

It  will  be  seen  that  most  of  these  causes  merely 
represent  different  phases  of  the  same  general  con¬ 
dition.  Widespread  indebtedness,  involving  over- 
extension  of  credit  by  the  banks,  is  the  main  feature 
that  brings  on  a  panic,  and  we  must,  in  every  case, 
have  a  condition  of  extensive  indebtedness  before  a 
great  panic  can  occur. 

Catastrophe  alone  not  sufficient  to  bring  on  panic. 

— A  great  catastrophe  may  induce  lower  prices,  but 
it  can  of  itself  never  bring  on  more  than  a  temporary 
money  stringency  or  a  flurry  in  general  business,  un¬ 
less  there  is  a  great  existing  indebtedness  to  beget 
widespread  distrust.  As  an  instance,  the  passage  of 
the  Embargo  and  Non-intercourse  act  in  1807, 
though  it  almost  destroyed  our  foreign  commerce, 
was  not  sufficient  to  bring  on  an  actual  panic,  there 
being  no  excessive  indebtedness  at  the  time.  The 
great  ten  million  dollar  fire  in  New  York  City,  De¬ 
cember,  1835,  was  not  sufficient  to  bring  on  a  panic 
or  even  to  cause  a  cessation  of  the  wild  realty  boom 
then  on,  and  because  of  the  rapid  rise  in  prices,  to 
the  amazement  of  all,  it  did  not  even  cause  a  failure. 
Neither  Black  Friday  nor  the  great  Union  Pacific 
corner  affected  commercial  and  industrial  lines  to 
any  important  extent.  Likewise  the  San  Francisco 
fire  failed  to  check  the  great  business  activity  of 
1906. 

The  failure  of  the  great  Panama  Canal,  though  it 


BUSINESS  CONDITIONS 


157 


hurt  thousands  financially,  did  not  create  a  panic  in 
France,  as  it  would  have  done  had  the  shareholders 
been  indebted  to  banks,  instead  of  having  paid  for 
the  stock  out  of  their  savings. 

No  commercial  panic  is  possible  when  business  is 
contracted  and  on  almost  a  cash  basis,  when  mer¬ 
chants  are  engaged  in  no  hazardous  undertakings 
and  old  debts  have  been  mostly  liquidated,  and 
when  everyone  is  practising  economy,  as  is  the  case 
two  or  three  years  after  a  commercial  panic.  Any 
disaster  happening  then  would  simply  tend  to  in¬ 
crease  the  depression — there  could  be  no  important 
recurrence  of  panic. 

Rapidly  growing  countries  suffer  most  from 
panic. — To  develop  natural  resources  both  capital 
and  credit  are  required.  Success  leads  on  naturally 
to  an  extension  of  credit  until  it  is  stretched  to  the 
limit,  and  hard  times  coming  on  find  the  borrower 
unable  to  pay,  as  cash,  not  material  resources,  is  nec¬ 
essary  for  payment.  Hence  a  rapidly  growing  coun¬ 
try,  with  vast  resources  to  develop,  like  the  United 
States,  generates  far  more  credit  than  an  older  coun¬ 
try  like  France,  for  example,  where  the  tendency  to 
overproduction  and  overextension  of  credit  is  much 
less  and  where  exports  and  imports  do  not  vary  so 
greatly;  therefore  the  former  suffers  much  more  fre¬ 
quently  and  severely  from  the  effects  of  panic. 

We  are  a  young,  optimistic,  enterprising  nation, 
exhilarated  by  the  great  opportunities  before  us,  and 
we  are  apt  to  overdo  and  to  overstrain  our  credit. 
Our  business  methods  are  as  yet  not  fully  estab¬ 
lished.  We  are  still,  to  a  great  extent,  in  the  forma¬ 
tive,  experimental  stage.  Also  our  thirst  for  capital 
is  keener  than  that  of  any  other  leading  nation,  as 
the  direct  result  of  our  greater  resources  and  the 


158 


HOW  TO  FORECAST 


task  of  developing  them.  The  more  rapid  the  prog¬ 
ress  made,  the  more  frequent  and  acute  are  these 
financial  crises. 

Investment  buying  in  older  countries. — Also,  in 
the  older  countries  there  is  a  large  and  rich  invest¬ 
ing  class,  who  have  money  to  buy  stocks  at  panic 
prices,  and  who  loan  when  money  is  high,  so  miti¬ 
gating  to  a  certain  extent  the  effects  of  the  panic. 

East  feels  panic  worst.— In  the  United  States  pan¬ 
ics  start  in  the  East,  as  it  is  the  money  center,  and 
a  panic  always  begins  in  the  financial  markets  with 
an  urgent  demand  for  money.  New  York  City,  being 
the  chief  money  market,  is  the  first  to  feel  the  ef¬ 
fects.  It  is  some  time,  generally  a  month,  before 
the  panic  is  fully  felt  on  the  Pacific  Coast.  New 
York  City  also  feels  it  the  worst,  though  many 
smaller  towns,  owing  to  an  insufficient  supply  of 
money,  may  take  longer  to  work  out  a  recovery. 

When  crisis  comes.— Says  one  writer:  “When  loan¬ 
able  funds  and  money  seeking  investment  are  ab¬ 
sorbed,  then  the  check  thereby  imposed  on  further 
ventures  brings  on  a  crisis.  Securities  and  goods 
accumulate,  an  appeal  to  the  banks  is  made  (as  it  is 
money  that  is  needed),  but  they  are  unable  to  re¬ 
spond  (or  disinclined  through  fear).  A  bargain  sale 
of  goods  and  securities  finally  ensues  in  order  to  get 
ready  cash  to  pay  pressing  debts,  and  a  crisis  is  on, 
intensified  by  the  widespread  feeling  of  panic  that 
prevails.’5 

Crisis  not  due  to  scarcity  of  money. — Because 
money  is  hard  to  get  in  a  panic,  there  has  often 
arisen  a  popular  delusion  that  scarcity  of  money  is 
the  cause  of  the  crisis.  In  fact,  however,  there  was 
an  abundance  of  money  in  1837,  1857,  1873  and  1893, 
the  per  capita  circulation  in  each  case  being  above 


BUSINESS  CONDITIONS 


159 


or  near  the  previous  maximum,  and  there  was  also  a 
large  amount  of  paper  money  compared  to  specie. 
The  crisis  is  due,  not  to  scarcity  of  money,  but  to  ex¬ 
cess  of  credit.  The  banks,  previously  overloaned,  are 
compelled  by  the  general  fright  to  call  in  their  loans 
suddenly,  and  sometimes  unadvisedly. 

Why  recent  crises  are  world-wide. — “Recent 
crises  have  been  as  world-wide  as  the  extension  of 
the  modern  mechanism  of  industry  and  credit,  and 
the  spread  of  the  disturbance  over  a  wider  area 
seems  to  mitigate  its  seve  nty  at  a  given  point.”  This 
is  due  in  large  measure  to  cheap  and  rapid  trans¬ 
portation  facilities,  the  telegraph  and  improved  busi¬ 
ness  methods.  A  surplus  in  one  market  is  conveyed 
quickly  and  cheaply  to  another  where  a  shortage  ex¬ 
ists,  so  that  prices  are  better  equalized. 

Old  wheat  prices.— In  1840,  one  writer  says,  grain 
varied  100  per  cent,  in  price  between  England  and 
Prussia,  and  a  deficiency  of  one-sixth  in  the  English 
harvest  (which  is  a  frequent  occurrence  in  every 
grain-growing  country)  raised  prices  there  from  100 
to  200  per  cent.  Wheat  in  England  in  1243  was  6  s. 
a  bushel,  48  s.  in  1246,  72  s.  in  1257,  and  28  s.  in  1286. 
Before  the  era  of  cheap  transportation  freight  on 
wheat  from  New  York  to  Buffalo  was  more  than 
the  wheat  was  worth.  It  took  longer  to  send  a  mes¬ 
sage  from  Wall  Street  to  Forty-second  Street  in 
New  York  City  than  it  takes  now  from  New  York  to 
San  Francisco.  A  crop  failure  in  past  centuries  often 
meant  starvation;  cheap  transportation,  better  bank¬ 
ing  and  business  methods,  crop  rotation,  etc.,  have 
changed  all  this. 

The  civilized  world  as  a  partnership. — Now  our 
business  relations  with  the  rest  of  the  world  are  fast 
assuming  many  of  the  phases  of  a  partnership,  or 


160 


HOW  TO  FORECAST 


at  least  a  mutuality  of  interests,  so  that  severe 
panics  or  reactions  in  one  country  soon  find  their 
reflection  in  others. 

It  is  the  money  market  that  is  at  the  basis  of  all 
financial  operations,  and  the  world’s  capital  becomes 
every  year  more  readily  transferable  from  one 
country  to  another.  Hence  money  market  con¬ 
ditions  affect  all  at  about  the  same  time.  It  is  easier 
now  for  New  York  to  borrow  money  from  Europe 
and  complete  the  transaction,  than  it  was  fifty  years 
ago  to  borrow  it  from  Philadelphia.  Alfred  R.  Wal¬ 
lace  says,  “The  ties  of  commerce  unite  nations  alike 
for  good  and  evil,  and  render  the  property  of  each 
dependent  upon  the  equal  prosperity  of  all  the  rest.” 

Panic  features.— When  the  panic  is  first  on,  we 
pour  into  the  outstretched  hands  of  Europe,  at 
panic  prices,  our  securities  and  our  grain,  and  we 
borrow  at  big  interest  rates  or  discounts  all  the 
ready  money  we  can  get,  to  help  tide  over.  At  this 
time  the  universal  demand  is  for  money  and  almost 
any  sacrifice  will  be  made  to  obtain  it. 

Disturbance  before  and  after  panic. — A  point 
worth  noting  is  “There  is  a  distinct  tendency  towards 
the  occurrence  of  a  pressure  or  disturbance  almost 
attaining  the  magnitude  of  a  crisis  at  a  time  both 
preceding  and  succeeeding  the  date  of  the  crisis 
proper.  In  several  instances  the  interval,  both  be¬ 
fore  and  after,  has  been  two  years.  This  presssure 
usually  occurs  at  the  same  season  of  the  year  as 
the  crisis.”* 

Panics  usually  occur  in  spring  or  fall. — Panics  sel¬ 
dom  occur  in  midsummer,  as  business  is  not  so  ac¬ 
tive  then  and  the  demand  for  money  is  therefore 
less.  They  generally  occur  in  the  spring  or  fall;  in 


*  Burton  on  Crises,  p.  30. 


BUSINESS  CONDITIONS 


161 


the  spring  when  the  foreign  drain  of  gold  is  likely 
to  be  greatest,  and  in  the  fall  when  there  is  the  lar¬ 
gest  demand  for  money  to  move  the  crops,  and  in  . 
some  years  to  carry  over  summer  accumulations  of 
manufactured  goods. 

Some  differing  features  of  securities  and  commer¬ 
cial  panics. — In  a  financial  or  stock  panic  the  panic 
itself  is  the  main  feature,  as  the  depression  follow¬ 
ing  it  is  short  lived  and  limited  in  scope;  but  in  a 
commercial  crisis,  while  the  panic  is  severe,  it  is  but 
a  secondary  feature  compared  with  the  long  and  try¬ 
ing  depression  that  sets  in  thereafter. 

The  commercial  panic  affects  not  only  financial 
markets,  but  also  manufacturing,  mining,  agriculture, 
transportation;  hence  all  lines  contribute  to  the  list 
of  failures,  and  their  numbers  and  aggregate  lia¬ 
bilities  grow  for  several  years  thereafter.  In  the 
case  of  the  financial  panic,  the  maximum  of  failures 
occurs  in  the  first  twelve  months  following  and  those 
later  on  are  relatively  small;  but  after  a  general  com¬ 
mercial  crisis  failures  will  continue  large  for  a  series 
of  years,  and  will  probably  reach  the  largest  amount 
in  one  of  the  later  years. 

First  failures. — When  the  panic  starts,  the  first 
failures  occur  mostly  through  inability  to  obtain 
credit  or  to  realize  by  immediate  sales,  whereas  later 
on  the  cause  is  more  apt  to  be  the  shrinkage  of 
values  and  inability  to  pay  because  of  exhaustion  of 
resources.  During  the  early  stages  bankers  and 
brokers,  and  those  whose  obligations  are  payable 
on  demand,  feel  the  pinch  worst.  Bankers  are  often 
weighed  down  by  the  burden  of  unsalable  stock  or 
bond  issues.  The  banker  is  the  broker  in  money 
and  credit,  and  most  of  his  debts,  are  payable  on 
demand;  therefore  during  a  panic  period  he  is  be- 


162 


HOW  TO  FORECAST 


sieged  from  all  directions,  as  the  demand  is  for 
money  and  ever  more  money.  Brokers  also  are 
among  the  first  to  succumb,  as  they  have  continu¬ 
ally  to  borrow  large  sums  of  money  and  their  obliga¬ 
tions  are  payable  in  cash  or  short  time  paper. 

Modern  business  is  carried  on  mostly  on  borrowed 
capital,  in  the  form  of  bills,  notes,  checks  and  open 
accounts.  This  is  credit.  It  is  the  business  of  the 
banks  to  issue  and  discount  these  evidences  of  credit, 
therefore  the  banks  are  the  storm  center  of  every 
panic.  Less  than  five  per  cent,  of  the  banker’s  busi¬ 
ness  is  in  cash,  and  his  main  customer,  the  big  mer¬ 
chant,  uses  checks  and  paper  almost  entirely  in  his 
business.  The  banker  transfers  credits.  Checks  and 
notes  constitute  buying  power  and  represent  credit, 
and  back  of  all  credit  is  confidence.  Impair  confi¬ 
dence  and  the  whole  structure  falls. 

Business  houses  fall  later. — Commercial  houses, 
having  a  long  line  of  credits  to  fall  back  on  and 
being  given  time  on  their  purchases,  do  not  feel  the 
worst  effects  of  the  panic  as  soon  as  banks,  trust 
companies  and  brokers.  They  therefore  do  not  fail 
as  quickly  as  the  latter,  but  their  turn  comes  later 
on. 

Farmers  feel  panic  least. — The  agricultural 
classes  are  little  affected  by  a  securities  panic,  and 
are  slower  to  feel  the  effects  of  a  commercial  panic 
than  the  rest  of  the  country;  in  fact,  they  never  feel 
it  as  badly,  and  farmers  seldom  fail.  This  is  be¬ 
cause  they  incur  but  little  indebtedness  and  their 
assets  are  always  salable,  being  food  products.  As 
we  must  live,  these  are  always  in  demand  at  some 
price. 

Runs  on  savings  banks. — Before  and  during  a 
panic  depositors  start  runs  on  savings  banks,  but 


BUSINESS  CONDITIONS 


163 


most  of  them  shortly  after  return  the  money  to  the 
bank.  Some,  however,  continue  to  hoard  it,  seek¬ 
ing  out  naturally,  through  heredity  perhaps,  the  hid¬ 
ing  places  used  by  their  ancestors.* 

No  money  in  Wall  Street. — It  is  usually  the  case 
that  for  several  days  during  the  height  of  the  panic 
practically  no  money  is  to  be  had  in  Wall  Street  at 
any  rate  of  interest. 

Greatest  fall  is  in  securities. — In  a  panic  the  great¬ 
est  fall  is  in  securities,  as  commodities,  being  in  a 
less  liquid  form  and  not  so  directly  connected  with 
the  money  market,  are  not  so  easily  affected  and  de¬ 
cline  more  gradually.  Stocks  bear  the  brunt  of  the 
excitement. 

Industrials  fall  most  in  panic. — During  a  panic  in¬ 
dustrial  stocks  fall  the  most  (especially  the  non-divi¬ 
dend  payers),  as  their  business  is  less  stable  and  will 
feel  the  depression  before  the  railroads.  The  greater 
part  of  the  shrinkage  in  stocks  takes  place  during  a 
few  days  of  great  excitement  on  ’change.  The 
reason  why  the  fall  in  stocks  at  the  end  of  the 
commercial  panic  period  is  not  still  greater  is 
that  for  several  years  previous  stocks  have  been 
very  low.  The  greatest  inflation  in  stocks  ended 
disastrously  several  years  before,  and  prices 
failed  to  recover  their  old  level.  Moreover,  they 
have  fallen  greatly  the  j^ear  preceding  the  panic. 
The  stock  market  has  been  very  quiet,  the  general 
public  being  entirely  out  and  professional  specula¬ 
tors  being  unable  to  raise  sufficient  funds  to  keep  up 

*  It  is  impossible  to  form  any  accurate  estimate  of  the  amount 
of  hoarding  that  goes  on  before,  during  and  after  a  panic. 
Everyone  who  hoards  knows  that  his  act  is  making  matters 
worse,  and  he  is  therefore  very  secretive  about  it.  Even  large 
capitalists  are  sometimes  suspected  of  storing  up  gold  or  cur¬ 
rency  when  a  panic  is  imminent. 


164 


HOW  TO  FORECAST 


much  activity.  Hence  there  is  no  great  indebtedness 
in  Wall  Street,  as  compared  with  previous  years. 

Why  gilt  edge  bonds  fall. — Gilt  edge  bonds  would 
probably  depreciate  but  little  in  panic  times  were  it 
not  for  the  fact  that  so  many  institutions  holding 
them  have  to  fortify  their  cash  accounts  by  hasty 
sales.  In  such  periods  as  this  only  the  best  find  sale 
and  then  at  rapidly  falling  prices.  The  great  fall  in 
such  bonds  does  not  usually  indicate  fear  of  these 
securities,  but  on  the  contrary,  that  they  are  so  good 
that  they  can  be  sold  in  the  worst  of  times,  when 
poorer  offerings  have  no  market. 

Government  bonds  fall  least. — During  a  panic 
there  is  for  a  time  an  almost  complete  lack  of  con¬ 
fidence  in  everything  except  government  bonds. 
These  fall  but  little  and  soon  recoyer  and  advance. 
Next  to  these  in  stability  are  state  and  municipal 
bonds  and  the  inactive  securities  of  solid  enter¬ 
prises  in  the  great  financial  centers,  providing  their 
credit  has  been  excellent  in  the  past. 

Security  of  principal  now  sought. — The  extent  of 
the  fall  in  securities,  after  the  initial  shock,  natur¬ 
ally  depends  first  on  the  degree  of  confidence  felt  in 
the  security  of  the  principal,  the  rate  of  interest  cut¬ 
ting  but  small  figure  for  a  time. 

Foreign  money  attracted. — During  a  panic,  when 
interest  rates  rapidly  advance,  foreign  money  rushes 
in  to  be  loaned,  as  it  is  a  natural  law  that  money 
goes  where  the  rate  of  interest  is  highest,  providing 
it  can  do  so  safely.  This  helps  end  the  panic  by 
supplying  gold. 

English  buj\ — The  English,  having  closer  business 
relations  with  us,  are  apt  to  be  among  the  first  for¬ 
eigners  to  buy  our  bonds  and  stocks  during  a  panic. 
The  low  prices  tempt  them,  and  being  further  re- 


BUSINESS  CONDITIONS 


165 


moved  from  the  seat  of  trouble,  they  generally  have 
a  clearer  and  sounder  view  of  the  situation.  This 
buying  helps  to  end  the  hysterical  stage  of  the  panic, 
as  it  shows  confidence  on  the  part  of  foreign  buyers 
that  the  bottom  has  been  reached. 

Most  people  will  not  buy  in  a  falling  market. — It  is 
not  human  nature  to  buy  on  a  declining  market, 
therefore  prices  in  panic  periods  are  not  sustained, 
but  go  greatly  below  the  intrinsic  value  of  the  prop¬ 
erty. 

The  psychological  aspect. — The  panic  stage  would 
not  be  so  severe  if  it  were  not  for  the  psychological 
effect  of  violently  falling  prices  on  the  mind  of  the 
speculator.  Elis  imagination  conjures  up  the  worst 
that  can  happen,  and  in  mortal  fear  of  that  worst  or 
of  some  bogie  which  he  has  created  in  his  own  mind, 
he  becomes  panic  stricken,  and  often  acts  like  a 
madman  on  that  occasion;  and  the  general  loss  of 
confidence  and  depression  of  sentiment  has  almost 
as  much  effect  as  the  actual  market  depreciation.  At 
such  times  some  of  the  excess  excitement  generated 
must  work  off  through  the  muscles  or  the  results 
to  the  brain  would  be  serious.  Even  such  a  sea¬ 
soned  speculator  as  Jay  Gould,  when  prices  were 
going  against  him  in  a  panic  and  he  was  losing  con¬ 
trol  of  the  assets  of  a  big  life  insurance  company, 
suddenly  administered  a  vigorous  kick  to  a  chair 
opposite  him  and  exclaimed  “Wow,  wow!”  As  men 
become  more  intellectual  and  less  emotional,  this 
psychological  aspect  of  the  panic  is  likely  to  grow 
less  important,  a  change  which  will  eventually  work 
great  good. 

Who  suffer  most. — The  wage  earner  and  the  re¬ 
tailer  suffer  less  during  and  immediately  after  a 
panic  than  the  manufacturer  and  wholesaler,  because 


166 


HOW  TO  FORECAST 


a  reduction  in  prices  does  not  affect  them  so  quickly, 
and  the  decline  actually  benefits  those  who  have 
fixed  incomes  or  assured  salaries. 

Material  wealth  little  affected. — The  effect  of  a 
panic  is  not  as  widespread  as  it  first  appears;  for 
the  material  wealth  of  the  country  is  but  little  af¬ 
fected  (except  as  it  has  been  previously  sunk  in 
permanently  unproductive  ventures — see  John  Mills 
on  Credit  Cycles).  Indeed,  as  Burton  says,  “Those 
countries  which  seem  to  suffer  most  from  these  dis¬ 
turbances  show  from  decade  to  decade  the  greatest 
increase  in  wealth  and  material  prosperity.”  Juglar 
also  says,  “Paradoxical  as  it  may  seem,  the  riches 
of  nations  can  be  measured  by  the  violence  of  the 
crises  which  they  experience.” 

Unfilled  orders. — Unfilled  orders  help  out  bank 
clearings  and  wages  in  a  panic  year,  as  compared 
with  the  years  that  follow. 

Stock  exchanges  closed. — Stock  exchanges  have 
sometimes  closed  for  a  few  days  in  times  of  panic, 
in  order  to  give  the  people  time  to  recover  from  the 
influence  of  the  mad  fear  they  are  under.  Often, 
however,  the  closing  of  the  exchange  has  merely 
served  to  intensify  the  fright. 

Clearinghouse  certificates. — In  recent  American 
panics  the  banks  have  relieved  the  situation  by  issu¬ 
ing  clearinghouse  certificates,  which  circulate  as 
money  until  the  hoarding  of  money  is  over,  when 
they  are  gradually  retired. 

First  indications  that  panic  is  lessening. — The  ces¬ 
sation  of  the  intense  demand  for  money  is  the  first 
indication  that  the  panic  is  ending,  but  confidence 
will  not  be  restored  for  some  time  thereafter.  The 
reign  of  terror  ceases,  but  confidence,  on  which 
credit  is  based,  is  slow  to  revive. 


BUSINESS  CONDITIONS 


167 


Effect  of  high  money  rate. — “In  panicky  times  the 
demand  on  the  banks  for  loans  and  discounts  com¬ 
pels  bankers  to  raise  the  discount  rate;  this  dimin¬ 
ishes  the  demand  for  credit  from  those  who  can  do 
without;  the  high  rate  attracts  capital  abroad  and 
locally  as  well,  and  prevents  also  the  calling  in  of 
many  loans  which  are  continued  at  higher  rates,  and 
so  helps  out  the  crisis  considerably.  After  the  acute 
stage  has  passed,  the  demand  for  credit,  because  of 
the  arrested  activity  and  the  want  of  good  collateral, 
declines  to  a  minimum,  resulting  in  a  great  reduc¬ 
tion  of  loans  and  discounts,  while  the  diminished 
demand  for  currrency  sends  it  back  to  the  solvent 
banks,  and  results  in  the  rapid  piling  up  of  specie  in 
their  reserves.”* 

Gold  imports  a  turning  point.—Gold  imports  mark 
generally  the  turning  point  in  the  panic.  The  high 
money  rates  and  the  small  premium  on  gold  or  cur¬ 
rency  which  usually  appears  at  this  time,  enable  the 
banks  to  borrow  gold  in  Europe.  After  this  comes  a 
falling  off  in  the  demand  for  this  European  gold;  in¬ 
dicating  that  the  situation  is  now  being  controlled 
and  that  the  worst  is  over. 

Disposition  now  to  do  little  or  no  business. — Dur¬ 
ing  a  panic  and  for  some  time  thereafter,  there  is  a 
strong  disposition  to  do  as  little  business  as  possible, 
and  to  reduce  indebtednesss  as  rapidly  as  may  be. 


*  Chas.  A.  Conant,  Yale  Review ,  Vol.  9. 


XIV — Depression  Following  Commercial 

Panic 


Covering  About  Three  Years  After  the  Panic,  and 
Including  the  End  of  Liquidation. 


[Note. — These  conditions  last  prevailed  in  1893-1896. 
If  the  next  commercial  panic  occurs  in  1913,  for  ex¬ 
ample,  they  would  be  substantially  repeated  about  1913- 
1916.] 

THE  depression  is  that  part  of  the  twenty  year 
period  after  the  panic,  when  a  long  period 
of  adjustment  sets  in,  when  lowest  prices  are 
reached  and  resources  are  husbanded,  so 
paving  the  way  for  better  conditions  later  on.  In 
general,  this  is  a  period  of  gloom,  yet  a  necesssary 
stage,  leading  up  finally  to  the  convalescence  of  the 
patient. 

Money  in  actual  circulation  shows  activity  of  busi-, 
ness. — It  is  the  amount  of  money  in  circulation,  and 
not  the  amount  in  banks,  that  shows  whether  busi¬ 
ness  is  active  or  otherwise.  After  a  panic  money 
soon  becomes  abundant  but  everyone  is  too  timid  to 
use  or  loan  it,  hence  it  remains  stored  up  idle  in  the 


BUSINESS  CONDITIONS 


169 


banks.  There  is  a  shrinkage  of  values,  a  diminution 
of  the  use  of  money,  stagnation  in  trade,  decline  in 
manufactured  output,  and  intense  endeavors  on  the 
part  of  business  men  generally  to  make  both  ends 
meet. 

Falling  off  in  imports. — A  rapid  decline  in  im¬ 
ports  takes  place  as  the  people  practice  economies  in 
expenditures.  Prices  fall  in  all  lines,  so  that  impor¬ 
tations  of  many  articles  become  unprofitable.  What 
makes  the  falling  off  in  imports  seem  even  greater 
is  that  a  fall  in  values  abroad  takes  place  at  the  same 
time.  Hence  even  the  same  quantity  of  imports  rep¬ 
resents  less  money. 

Gilt  edge  bonds.— The  principal  investments  for  a 
while  are  those  which  have  withstood  the  panic  best, 
as  United  States  Government,  state,  municipal  and 
some  other  gilt  edge  bonds,  on  which  the  owner  can 
borrow  money  as  he  may  need  it.  The  small  de¬ 
mand  that  exists  for  bonds  at  first  comes  from  the 
banks,  trust  and  insurance  companies,  estates  and 
cautious  investors,  these  being  the  main  sources  of 
ready  money.  Most  individuals  need  their  money  in 
their  business  or  are  too  poor  to  have  any  surplus, 
or  have  so  little  and  are  so  ignorant  on  the  subject 
of  investment  that  they  prefer  to  place  it  in  savings 
banks  to  be  invested  for  them.  Some  are  so  badly 
frightened  that  they  trust  no  one  and  even  hide  their 
mone}*. 

The  bonds  of  cities  have  generally  only  a  local 
demand,  and  are  therefore  not  as  much  favored  by 
the  outside  public  as  government  bonds.  The  same 
applies  in  a  lessened  measure  to  state  bonds.  The 
bonds  of  the  best  and  most  favorably  known  states 
and  municipalities  fall  less,  and  are  later  on  more 


HOW  TO  FORECAST 


$70 

eagerly  sought  after  than  of  those  not  so  well 
known. 

Government  bonds  first  to  rise. — United  States 
Government  bonds  are  the  first  to  rise  after  the 
panic.  The  high  price  and  small  interest  return  are 
for  a  while  but  little  considered  by  purchasers,  as 
they  still  look  principally  to  safety  of  principal. 

Governments  go  through  same  paying  up  period. — 

The  United  States  Government,  states,  cities,  coun¬ 
ties,  corporations  and  individuals,  all  alike  go 
through  the  same  paying  up  period  after  a  commer¬ 
cial  panic.  All  this  reduces  credits  and  so  releases 
money  for  general  circulation. 

Protests  against  taxes. — An  indication  that  the 
shoe  pinches  now  is  found  in  protests  against  high 
taxes  which  were  increased  in  boom  times  and  were 
cheerfully  borne  then,  when  realty  prices  were  mov¬ 
ing  upwards,  but  which  for  some  time  past,  with 
declining  values,  have  been  a  burden. 

Social  unrest.— -During  the  period  of  depression 
before  and  after  the  commercial  panic,  the  world’s 
rulers  are  kept  awake  nights  with  the  burning  ques¬ 
tions  of  the  hour,  and  the  people  are  demanding 
greater  rights.  In  America,  as  the  people  them¬ 
selves  are  the  ruling  power,  the  position  of  the  gov¬ 
ernment  is  not  so  precarious.  The  unrest  takes  more 
the  form  of  antagonism  toward  the  excessively  rich 
capitalist  and  his  corporate  enterprises.  These  agi¬ 
tations,  while  in  the  long  run  evolving  much  that  is 
good,  undoubtedly  tend  at  the  moment  to  intensify 
existing  conditions.  Strikes  also,  on  a  falling  market, 
act  in  the  same  way,  and  often  bring  out  some  of 
the  worst  phases  of  human  nature.  They  are  seldom 
successful  at  this  time,  leaving  both  employer  and 


BUSINESS  CONDITIONS 


171 


employee  in  worse  shape  than  before  to  meet  the 
depressing  conditions. 

Small  business  in  Wall  Street. — Brokers  and 
traders  complain  that  the  public  now  takes  no  in¬ 
terest  in  Wall  Street;  yet  everywhere  and  at  all  times 
professionals  are  publicly  predicting  all  manner  of 
evil  happenings.  Some  one  with  courage  starts  an 
incipient  bull  movement  and  everyone  else  immmedi- 
ately  sells  short  and  yells  “Panic.”  Still  they  com¬ 
plain  that  the  stock  market  remains  dull.  The  pub¬ 
lic  is  seized  with  a  condition  of  nervous  indecision 
and  is  content  to  do  nothing.  Prices  go  below  in¬ 
trinsic  values  owing  to  an  almost  entire  absence  of 
purchasers  and  speculators.  Securities  susceptible 
of  easy  conversion  and  those  which  retain  their  mar¬ 
ket  values  the  best  are  about  the  only  ones  purchased 
by  the  public. 

Pig  iron. — The  production  of  pig  iron  may  show 
a  small  increase  just  after  a  panic.  If  so,  it  is  the 
result  of  filling  old  orders,  and  does  not  come  from 
new  ones.  The  amount  of  new  orders  received  is 
the  better  indicator  of  the  times. 

Exports  increase. — Early  in  the  depression  our 
exports  increase,  first  because  of  the  decreased  pur¬ 
chasing  power  of  our  people  and  the  sale  of  what 
we  have  on  hand  abroad  at  bargain  prices.  Later 
the  increase  is  due  to  still  lower  prices  and  enlarged 
output — the  fruitage  of  economy,  enlarged  manufac¬ 
turing  facilities,  lessened  wages,  and  the  enormous 
natural  wealth  at  our  disposal.  Inventive  genius  is 
also  at  work  reducing  costs,  and  labor,  after  futile 
strikes,  is  much  more  tractable  and  efficient.  All 
these  factors,  backed  up  by  dire  necessity,  open  up 
to  us  foreign  markets  that  we  had  thought  were 
hopelessly  closed  against  us.  This  enables  us  in 


172  HOW  TO  FORECAST 

time  not  only  to  pay  up  our  European  debts,  but 
eventually  to  become  the  creditor  ourselves. 

Mercantile  failures.— -Mercantile  houses  begin  to 
fail  in  great  numbers  about  two  weeks  after  the 
panic.  Comparatively  few  fail  before  then,  being 
those  who  happen  to  have,  at  that  time,  urgent  calls 
for  ready  money.  The  constant  rise  in  values  dur¬ 
ing  boom  years  enabled  the  half-insolvent  debtor  to 
extend  his  liabilities  from  year  to  year  on  the 
strength  of  the  showing  he  could  make  by  the  aid  of 
the  rise,  while  still  increasing  his  volume  of  in¬ 
debtedness.  When  this  support  is  removed  and 
prices  begin  to  fall,  the  decline  soon  dissipates  his 
equity,  and  he  finds  himself  leading  the  list  of  newly 
fledged  bankrupts. 

When  most  failures. — If  the  crisis  itself  were  the 
most  important  event,  as  in  the  securities  or  finan¬ 
cial  panic,  the  greatest  number  of  failures  would 
occur  then,  but  when  the  depression  is  the  most  im¬ 
portant,  as  in  all  commercial  panics,  the  failures  are 
large  for  some  years  and  reach  the  maximum  in 
from  three  to  five  years — as  after  1873,  in  1878,  and 
after  1893,  in  1896. 

Assets  realized. — The  percentage  of  assets  real¬ 
ized  from  firms  that  fail  two  or  three  years  after  the 
panic  is  less  than  from  those  that  fail  during  the 
panic  year.  The  former  have  held  on  until  the  last 
moment  and  have  graduallly  exhausted  their  re¬ 
sources,  and  often  a  species  of  dry  rot,  as  it  were, 
has  set  in;  whereas  the  latter,  having  outstanding 
obligations  to  meet  that  called  for  immediate  pay¬ 
ment,  were  compelled  to  fail  while  still  owning  as¬ 
sets  which  later  could  be  realized  upon.  Those  who 
fail  later  have  exhausted  this  fund  by  the  time  they 


BUSINESS  CONDITIONS 


173 


assign.  Many  of  those  who  fail  in  panic  times  are 
able  to  resume  if  dealt  with  leniently. 

Interest  rates  fall  when  fear  lessened.— When  the 
demands  of  the  necessitous  after  a  panic  have  been 
satisfied  or  lefused,  money  accumulates  in  the  banks 
and  interest  rates  fall  correspondingly;  not  at  once, 
but  as  soon  as  the  great  fear  has  lessened. 

Some  of  the  hoarded  money  now  spent. — The  first 
money  that  comes  from  hiding  after  a  depression, 
and  when  measures  have  been  taken  by  banks  to 
prevent  further  hoarding,  is  the  money  actually  ex¬ 
pended  for  necessaries  and  overdue  bills  which  must 
be  paid  in  cash.  The  actual  depositing  in  banks  of 
surplus  hoarded  cash  does  not  take  place  till  later, 
when  confidence  is  more  fully  established. 

Prices  still  falling. — After  a  panic  values  still  fall 
in  many  lines  so  that  merchants  continue  to  incur 
losses,  hoping  always  for  the  time  when  they  can  do 
business  on  a  safe,  conservative  basis.  This  time 
will  not  come  until  values  reach  their  bottom  level, 
expenses  are  cut  to  a  minimum  and  frugal  habits  es¬ 
tablished.  In  the  meantime  it  is  a  case  of  the  sur¬ 
vival  of  the  fittest.  The  weaker  drop  out  one  by  one 
and  terminate  their  careers  in  the  bankruptcy  court 
or  in  financial  oblivion. 

Raw  materials  fall  most. — Raw  materials  now  fall 
more  in  proportion  than  manufactured  articles.  The 
products  of  the  soil,  mines  and  forests  have  had  the 
greatest  rise,  and  are,  moreover,  less  affected  by 
combinations  and  trade  agreements  and  so  lack  this 
supporting  element.  However,  the  tendency,  even  in 
natural  resources,  is  toward  larger  ownership  by 
constantly  decreasing  numbers  of  persons. 

Which  stocks  suffer  most. — The  highly  speculative 
stocks,  which  in  boom  times  were  active  favorites 


174 


HOW  TO  FORECAST 


on  the  Stock  Exchange,  suffer  more  severely  during 
and  after  the  panic  than  those  that  have  not  been 
manipulated  so  extensively.  Non-interest-bearing 
stocks  are,  naturally,  among  the  first  to  fall,  go  the 
lowest,  and  are  the  last  to  rise. 

Railroad  earnings  keep  up  better  than  industrial.— 
The  railfoads  maintain  their  earnings  better  than 
industrials,  as  some  manufacturers  endeavor  to  en¬ 
large  their  output  in  order  to  make  up  for  deficiency 
in  profits,  part  of  their  goods  being,  in  many  cases, 
shipped  abroad.  Moreover,  there  is  a  rush  after  a 
panic  to  realize  cash  at  any  price,  and  this  also  in¬ 
volves  transportation.  Thus  tonnage  was  larger  in 
the  panic  year  1893  than  in  1892.  A  year  after 
the  panic  the  railroads  begin  to  feel  its  full  effects, 
as  it  takes  some  little  time  for  business  to  subside  to 
the  lowest  level  and  so  react  fully  on  these  great 
highways  of  transportation,  which  represent  in  their 
yearly  business  the  volume  of  freight  and  passengers 
transported  during  the  year. 

Railroads  curtail  expenses. — Railroads  now  curtail 
expenses  and  reconstruction  and  so  fortify  their  po¬ 
sition.  Absorption  of  some  of  the  weaker  lines  usu¬ 
ally  takes  place.  Their  high  interest  bearing  obliga¬ 
tions  are  refunded  at  lower  interest,  fixed  charges 
are  scaled  down,  and  speculative  managements  are 
succeeded  by  more  conservative  ones.  Later  on, 
aided  by  large  tonnage  from  the  crops  and  by  gradu¬ 
ally  increased  business,  they  are  slowly  lifted  out 
of  their  unhappy  condition. 

Imagination  conjures  up  many  fears. — In  times  of 
severe  depression  the  people  go  to  extremes  and  im¬ 
agine  that  the  existing  unfavorable  conditions  will 
continue  indefinitely  and  even  develop  into  still 
worse;  that  production  is  steadily  increasing  over 


BUSINESS  CONDITIONS 


175 


consumption,  and  that  other  bad  features  are  acting 
more  adversely  than  is  really  the  case.  Consequently 
prices  drop  abnormally — a  barometer,  as  it  were,  of 
the  fears  of  the  public,  rather  than  of  actual  condi¬ 
tions. 

People  hold  on  to  their  money. — F\or  some  time 
the  people  choose  to  do  nothing,  after  their  surfeit 
of  speculation,  rather  than  run  the  risk  of  doing 
wrong.  Those  who  have  money  now  hold  on  to  it 
with  the  grasp  of  anxiety  and  distrust,  imagining  in 
almost  every  proposition  offered  a  scheme  to  part 
them  from  their  precious  belongings.  Better  to 
leave  their  money  idle  in  the  bank  or  vault,  they 
think,  than  to  venture  it  in  such  financial  weather. 
It  is  not  until  considerably  later,  when  the  bell  weth¬ 
ers  in  finance  have  ventured  out  and  are  undeniably 
making  money,  that  the  masses  acquire  courage 
enough  to  follow  their  example. 

Business  on  cash  basis. — After  the  panic,  as  credit 
is  partially  destroyed,  business  has  to  get  as  near  to 
a  cash  basis  as  is  possible  under  modern  methods. 
It  is  only  after  some  little  time,  when  the  fright  is 
over  and  values  cease  falling,  and  when  business 
men  know  to  whom  it  is  safe  to  extend  credit,  that 
credit  begins  to  enlarge.  This  movement  is  slow  at 
first,  especially  as  many  prefer,  because  of  small 
margin  of  profit,  to  do  less  business  and  avail  them¬ 
selves  of  cash  discounts. 

Idle  fund  sign  of  stagnation. — The  plethora  of 
funds  on  deposit  is  now  an  indication  of  suspended 
industry  and  a  barometer  of  the  times.  We  are 
likely  to  loan  to  Europe  at  this  time,  as  interest 
rates  there  may  be  higher;  and  this,  with  debt  pay¬ 
ing  and  taking  back  our  securities,  causes  gold  to  be 
exported. 


176 


HOW  TO  FORECAST 


We  pay  up  foreign  debts  and  take  back  our  stocks. 

— When  a  debtor  finds  it  hard  to  pay  a  creditor,  the 
creditor  is  apt  to  lose  confidence  in  the  debtor.  After 
a  panic,  Europe  as  the  creditor  demands  a  speedy 
settlement  before  doing  any  more  business  with  us. 
There  follows  a  period  of  paying  up  our  foreign 
debts  and  taking  back  our  stocks  from  abroad.  This 
continues  through  exports  of  gold  and  merchandise 
until  the  indebtedness  is  settled  and  a  large  credit 
balance  accumulates  in  our  favor,  putting  us  finally 
on  a  solid  basis  once  again. 

People  working  hard. — The  people  now  settle 
down  to  hard  work  in  earnest  to  make  up  for  the 
losses  sustained  or  debts  incurred.  We  are  con¬ 
stantly  studying  now  how  to  make  our  expenditures 
less  and  our  money  and  efforts  more  productive. 
Overstocks  are  greatly  reduced,  even  below  what 
they  should  be;  extravagant  expenses  in  living  and 
in  business  are  within  bounds;  wages  are  universally 
lowered,  prices  of  raw  material  cut,  and  cost  of  pro¬ 
duction  in  all  its  elements  reduced,  to  enable  business 
to  be  done  with  as  many  chances  as  possible  in  its 
favor. 

Expensive  houses  vacated. — At  this  time  many  of 
the  finer  houses  are  closed  or  offered  for  sale  cheap, 
and  their  occupants  sojourn  in  boardinghouses, 
which  now  increase  and  multiply,  though  often  not 
on  a  living  basis.  The  numbers  of  such  boarding¬ 
houses  is  increased  by  many  owners  of  homes  who 
now  take  in  boarders  in  order  to  augment  their  slen¬ 
der  means,  but  too  frequently  this  merely  prolongs 
their  worries  until  the  mortgage  is  finally  foreclosed. 

Back  to  the  land. — The  source  of  all  wealth  is 
Mother  Earth,  so  back  we  go  at  an  early  period  of 
the  depression,  to  the  tilling  of  the  soil,  working  in 


BUSINESS  CONDITIONS 


177 


mines  and  forests,  and  at  the  fisheries,  to  recuperate 
our  wasted  fortunes  and  rebuild  the  sub-strata  for 
another  upward  movement  in  the  future,  producing 
raw  materials  cheaper  than  before  and  thus  cheap¬ 
ening  manufactures,  opening  up  a  foreign  market, 
and  gradually  increasing  home  consumption  by 
reason  of  low  prices.  There  is  and  has  been  for 
some  time  past  a  quiet  but  steady  flow  of  population 
from  the  city  to  the  land. 

Depression  helps  people  the  West.— -The  depres¬ 
sion  attending  a  commercial  panic  increases  emigra¬ 
tion  from  East  to  West.  In  1873  it  peopled  the 
country  west  of  the  Missouri,  and  in  1893  added 
vastly  to  the  number  of  farmers  about  Omaha  and 
in  the  far  Northwest.  The  East,  being  the  manufac¬ 
turing  and  business  center,  has  no  employment  for 
many  of  its  people,  so  they  go  West,  where  the  nat¬ 
ural  resources  are  the  fountain  of  all  wealth. 

Rally  from  panic. — A  year  or  two  after  the  panic 
there  is  a  short  rally,  which  is  greater  than  is  justi¬ 
fied,  and  raises  the  hopes  of  the  masses;  but  hopes 
will  not  change  actual  conditions  and  depression 
soon  assumes  full  control  again.  After  a  panic  many 
entertain  the  erroneous  idea  that  all  that  is  neces¬ 
sary  to  restore  business  to  a  paying  basis  is  the  res¬ 
toration  of  confidence;  but  finally  they  realize  that 
confidence  does  not  pay  debts,  but  that  every  dollar 
has  to  be  earned,  while  their  living  expenses  con¬ 
tinue,  and  that  the  readjustment,  though  long  and 
irksome,  must  run  its  regular  course. 

Legal  measures.— After  the  panic,  if  there  has  been 
legislation  which  helped  to  bring  it  on  or  to  intensify 
the  depression,  laws  are  likely  to  be  passed,  after 
long  and  tedious  delays,  to  remedy  the  same;  but, 
unfortunately,  not  content  with  this,  legislators  are 


178 


HOW  TO  FORECAST 


apt  to  go  further  and  endeavor  by  passing  other  laws 
to  help  out  the  situation.  Most  such  laws  are 
framed  in  ignorance,  and  the  majority  of  them  fail 
of  passage.  The  state  legislatures  being  smaller  and 
less  deliberate  bodies  than  the  national  Congress,  and 
often  ignorant  or  swayed  by  passion,  are  more  apt 
to  enact  hasty  laws  which  leave  a  depressing  influ¬ 
ence.  The  mere  discussion  of  many  of  these  meas¬ 
ures  in  Congress  or  in  state  legislatures  retards 
financial  recovery. 

A  new  political  party. — The  birth  of  a  radical 
party  (or  a  great  growth  in  some  such  existing 
party)  is  an  event  likely  to  take  place  some  time  be¬ 
fore  this  period,  but  it  does  not  receive  sufficient  en¬ 
couragement  to  be  a  really  serious  menace  to  the 
public  welfare,  until  later,  when  it  is  joined  by  many 
of  the  farmers,  now  thoroughly  discontented  with 
their  lot  because  of  low  prices  for  their  farm  prod¬ 
ucts.  If  not  satisfied  with  the  platform  of  this  party, 
the  farmers  may  form  one  of  their  own. 

Bankruptcy  law  passed. — Some  time  after  the  com¬ 
mercial  panic  a  bankruptcy  law  is  generally  passed, 
if  not  already  in  existence,  to  allow  the  financial 
wrecks  to  clear  up  their  records  and  start  anew. 

Plenty  of  idle  money. — During  a  depression  money 
is  plenty,  owing  to  a  cessation  of  all  but  absolutely 
necessary  work  and  the  consequent  partial  stagna¬ 
tion  in  all  lines  of  business.  Again  Western  bank 
money  seeks  New  York  City  banks,  in  order  to  get 
the  small  rate  of  interest  paid  on  out  of  town  bank 
deposits.  An  increase  in  savings  bank  deposits  in 
poor  times  is  not  a  positive  indication  of  the  better¬ 
ment  of  the  working  classes,  for  some  of  it  is  money 
that  in  better  times  would  be  invested  so  as  to  bring 
in  a  higher  return. 


BUSINESS  CONDITIONS 


179 


Wreckage  being  cleared  away. — Bank  clearings,  of 
course,  show  less  business  done;  yet  the  times  are 
really  improving,  inasmuch  as  the  wreckage  is  being 
cleared  away,  and  we  are  no  longer  leaning  on  crip¬ 
pled  banks  for  support. 

Money  begins  to  find  its  way  to  Wall  Street. — 

When  bank  deposits  increase  so  that  they  become 
fairly  burdensome,  interest  rates  go  still  lower,  and 
money  begins  to  seek  Wall  Street  owing  to  the 
decidedly  better  returns  on  stocks  and  bonds  than 
in  business  ventures.  Later,  these  moneys  help  to 
raise  the  price  of  Wall  Street  securities,  but  too 
many  safe  deposit  vaults  still  hold  worthless  stocks 
and  bonds  and  other  evidences  of  speculation,  for 
the  times  to  improve  much  as  yet. 

How  long  dull  market  lasts. — When  prices  are 
high  a  dull  market  is  not  apt  to  last  long,  but  when 
it  comes  at  the  end  of  a  long  decline  it  may  seem 
almost  interminable.  In  the  former  case  the  rise  has 
enriched  the  owners  of  securities  and  they  are  in  a 
position  to  do  business,  but  the  decline  has  entailed 
heavy  losses  and  has  curtailed  credits,  so  that  the 
dullness  is  of  long  duration  at  this  time. 

Capital  not  ready  to  act  yet. — As  long  as  the  coun¬ 
try  is  loaded  down  with  an  incubus  of  bad  debts  and 
rottenness  in  firms  and  corporations  continues  to  de¬ 
velop,  brought  over  as  a  heritage  from  the  panic  year 
and  augmented  by  the  subsequent  depresssion,  cap¬ 
ital  is  in  a  state  of  suspense  and  timidity.  The  fear¬ 
ful  investor  will  not  place  his  money  on  any  sort  of 
time  engagement  when  unfavorable  legislation,  an 
attack  on  the  soundness  of  the  currrency,  a  threat¬ 
ened  or  actual  war,  or  other  causes  which  might  at 
any  time  loom  up  before  him,  would  work  him  a  loss. 

Any  future  tinged  with  doubt  and  uncertainty 


180 


HOW  TO  FORECAST 


acts  as  a  check  on  business  enterprise,  especially  the 
placing  of  capital  in  permanent  investments,  which  is 
so  necesssary  to  the  return  of  prosperous  times.  The 
labor  strikes  attending  the  depression  must  be  elim¬ 
inated  before  a  decided  improvement  takes  place  and 
the  unpleasant  disclosures  attending  the  panic  must 
become  a  thing  of  the  past. 

Competition  now  active. — Railroads  are  hauling 
freight  at  a  very  small  profit  in  order  to  keep  busy, 
doing  as  all  are  now  d<3ing  in  an  endeavor  to  in¬ 
crease  their  profits  or  save  themselves  from  loss  by 
transacting  a  large  business  even  though  at  low 
rates.  Competition  is  active  and  later  is  made  more 
so  by  the  accumulation  of  idle  capital  trying  to  earn 
even  a  small  rate  of  interest. 

Agreements  to  restrict  output  now  futile. — At¬ 
tempts  by  individuals  or  corporations  to  sustain  un¬ 
natural  prices  by  agreements  to  restrict  production 
are  self  defeating  at  this  time,  for  the  tendency  of 
capital  is  to  favor  the  enterprises  that  are  strong 
enough  to  sustain  themselves  against  the  world. 

Coming  of  good  times  may  be  delayed. — When 
general  conditions  are  favorable  to  a  rise,  the  ad¬ 
vent  of  good  times  may  yet  be  deferred  by  the  fear 
of  unwise  financial  tinkering  of  the  laws,  or  by  de¬ 
mands  of  one  of  the  great  political  parties  that  might 
lead  to  an  unsettling  of  values. 

A  trying  period. — -The  completion  of  liquidation 
after  a  panic  is  marked  by  dull  business,  steady 
prices,  and  a  great  increase  in  bank  surplus.  It  is 
at  this  period,  in  the  very  last  stages  of  the  depres¬ 
sion,  that  the  times  are  hardest  upon  the  business 
man,  and  it  causes  the  heaviest  drain  on  his  already 
lessened  capital  and  his  patience.  It  has  been  a 
slow  and  tedious  liquidation,  especially  to  many 


BUSINESS  CONDITIONS 


181 


who  have  lived  too  long  the  life  of  spendthrift  heirs 
to  make  the  process  a  pleasing  one,  however  healthy 
and  necessary  it  may  be. 

Why  large  crops  and  mineral  output  now.— Sev¬ 
eral  years  after  the  panic,  so  many  have  gone  into 
developing  the  country’s  natural  resources  and  have 
worked  so  hard  at  it  that  the  result  is  apt  to  be 
large  crops  and  a  great  output  of  minerals  and  other 
raw  materials. 

Purchasing  power  of  people  increased. — During 
the  latter  part  of  the  hard  times  the  purchasing 
power  of  the  people  is  gradually  increasing,  and  far 
more  than  one  thinks.  This  continues  for  a  long 
time  thereafter.  The  lowest  period  of  the  depres¬ 
sion,  to  the  unobservant  eye,  appears  to  last  several 
years  before  there  is  any  visible  sign  of  improve¬ 
ment.  As  a  matter  of  fact,  however,  the  period  is 
much  shorter  than  this.  Natural  forces  soon  cause 
either  an  advance  or  a  further  recession,  abhorring  a 
period  of  inaction  almost  as  much  as  nature  abhors  a 
vacuum. 

Savings  banks. — During  the  depressed  times  be¬ 
fore  and  after  a  commercial  panic  the  prices  of  bonds 
and  choice  stocks  fall  to  a  level  that  enables  savings 
banks  to  buy  advantageously.  Then  after  the  re¬ 
covery  gets  under  way,  the  banks  can  increase  their 
rate  of  interest,  and  this  helps  to  draw  money  from 
hiding  places.  Such  purchases  often  afford  the  bond 
market  support  at  a  time  when  it  is  very  acceptable. 

Railroad  bonds  finally  inspire  confidence. — As  the 
process  of  foreclosure,  liquidation  and  substitution 
of  lower  interest  bearing  bonds  nears  its  end,  rail¬ 
road  securities,  the  bonds  particularly  at  first,  gradu¬ 
ally  itispire  more  confidence  in  t  financial  circles.  It 
is  the  old,  tried,  well-known  issues  that  are  wanted 


182 


HOW  TO  FORECAST 


at  this  time,  and  no  new  issues  can  be  floated  unless 
they  are  unquestionable  first  liens  on  the  best  roads. 
The  successful  flotation  of  new  issues  marks  a  period 
of  returning-  confidence  and  shows  that  the  crisis 
feature  is  over  and  the  depression  is  passing  away. 
Both  banks  and  investors  grow  less  cautious  in  their 
selections  as  the  supply  of  money  keeps  piling  up, 
and  as  good  securities  are  gradually  taken  out  of  the 
market  and  transferred  to  the  strong  boxes  of  the 
purchasers. 

Returning  confidence. — Money  piling  up  in  the 
banks  instead  of  going  into  use,  indicates  an  abnor¬ 
mal  condition — that  fear  still  reigns  in  place  of  con¬ 
fidence;  but  the  accretion  of  funds  steadily  continues 
until  confidence  gradually  asserts  its  sway.  The 
growth  of  confidence  naturallly  depends  on  the  force 
of  the  shock  it  previously  sustained,  and  on  the  vari¬ 
ous  surrounding  conditions,  favorable  and  unfavor¬ 
able.  But  the  knowledge  that  such  great  sums  are 
accumulating  in  the  banks  of  the  country  is  an  im¬ 
portant  factor  in  restoring  confidence.  Such  an  ac¬ 
cumulation  of  money  acts  as  an  object  lesson  and 
tends  ultimately  to  cheapen  the  value  of  money,  de¬ 
priving  it  of  the  false  estimate  that  has  been  put  on 
it  for  some  time  past.  Finally  it  becomes  necessary 
for  the  owners  of  this  capital  to  get  an  interest  re¬ 
turn,  and  the  money  gradually  begins  to  circulate 
in  businesss  channels  and  thus  to  start  up  better 
times.  So  again  an  extreme  cures  itself.  Loans  and 
discounts  are  the  best  indices  at  this  time  of  the  re¬ 
turn  of  confidence,  and  they  form  at  all  times  the 
best  barometer  of  mercantile  activity. 

Duration  of  depression. — The  depression  that  fol¬ 
lows  a  securities  panic  is  generally  light  and  lasts 
only  about  a  year,  but  that  following  a  commercial 


BUSINESS  CONDITIONS 


183 


panic  is  far  more  severe  and  lasts  from  four  to  six 
years.  The  greater  the  depression  and  the  longer 
continued,  if  the  result  of  ordinary  causes,  the 
greater  finally  will  be  the  reaction;  for  it  is  during 
this  time  that  savings  are  accumulating,  and  the  lar¬ 
ger  this  fund  becomes  the  larger  is  the  amount  to 
draw  upon  when  prosperity  starts,  and  consequently 
the  greater  the  boom  that  follows. 

Production  checked  and  decline  stopped. — Prices 
have,  in  some  industries,  fallen  to  the  average  cost 
of  production  or  even  below,  and  in  all  cases  the 
profit  is  now  small.  This  has  diminished  production 
and  checked  the  decline,  and  marks  the  end  of  the 
liquidation.  The  number  of  failures  is  still  large,  but 
the  liabilities  are  growing  smaller.  This  indicates 
that  liquidation  has  reached  the  point  where  those 
financially  well  fortified  are  producing  cheaper  and 
marketing  at  less  cost  than  their  small  competitors, 
and  that  the  trouble  is  now  mostly  confined  to  these 
latter,  whose  insufficient  capital  is  a  severe  handicap 
and  does  not  allow  them  to  do  a  sufficient  volume  of 
business  at  the  lessened  rate  of  profit  to  make  their 
business  pay.  They  are  unable  to  take  advantage 
of  the  many  little  savings  that  a  larger  concern  can 
put  into  operation;  so  that,  while  the  large  manufac¬ 
turers  and  wholesalers  are  first  to  feel  improving 
conditions,  the  small  manufacturers  and  dealers  are 
often  still  in  extremis. 

When  lowest  point  may  be  expected. — The  lowest 
point  of  the  depression  is  usually  in  June  or  July, 
when  most  business  lines  would  naturally  be  most 
affected  by  the  approaching  midsummer  dullness. 

Confidence  returns  when  once  bottom  is  reached. 
— Much  capital  remains  idle  and  dividends  dimin¬ 
ished  or  discontinued  until  the  liquidation  has  been 


184 


HOW  TO  FORECAST 


thorough  and  business  is  mostly  down  to  a  cash 
basis,  with  short  time  credits,  economy  in  manage¬ 
ment,  investments  strictly  non-speculative  and  on  an 
interest  basis,  new  enterprises  almost  eliminated,  and 
prices  so  low  as  to  meet  the  necessities  of  the  con¬ 
sumer  and  so  create  a  market.  At  length  nearly 
everyone  becomes  satisfied  that  the  bottom  has  been 
reached,  and  from  then  on  confidence  gradually 
grows  and  forms  the  basis  of  new  credits;  for  there 
is  nothing  that  will  undermine  confidence,  and  hence 
credit,  like  falling  values. 

When  to  buy. — One  writer  has  said  that  the  time 
to  buy  is  when  the  decline  caused  by  a  panic  has 
produced  such  liquidation  that  loans  and  discounts, 
after  steady  and  long  continued  diminution,  either 
become  stationary  for  a  period  or  begin  to  increase 
progressively,  coincident  with  a  steady  increase  in 
available  funds.  It  is  this  period  in  the  stage  of  pro¬ 
gression  that  we  have  now  reached,  when  the  bot¬ 
tom  has  been  touched  and  the  tendency,  though 
often  so  slow  as  not  to  be  realized,  turns  upward. 

First  year  of  betterment. — The  year  that  shows  the 
greatest  number  of  failures  is  the  period  when  the 
first  signs  of  betterment  are  noticeable — it  is  the 
clearing  up  of  the  atmosphere  after  the  storm. 

Even  low  interest  rates  attract  idle  capital. — When 
the  masses  are  satisfied  that  the  bottom  has  been 
reached  (for  there  can  be  no  hope  of  recovery  until 
faith  in  the  permanence  of  values  can  be  re-estab¬ 
lished),  even  a  low  rate  of  interest  serves  to  attract 
capital  and  to  start  enterprises  that  can  now  be  made 
to  pay,  even  at  low  prices;  for  interest,  wages  and 
raw  materials  are  all  corrrespondingly  cheap,  and 
the  population  which  represents  the  demand  is  in- 


BUSINESS  CONDITIONS 


185 


creasing  much  faster  than  is  allowed  for  by  the  pro¬ 
ducer. 

A  slow  rise  in  prices. — Production  has  now  fallen 
below  what  is  sufficient  to  keep  up  with  the  increase 
in  population.  After  this  condition  has  existed  for 
some  little  time,  surplus  stocks  become  thoroughly 
exhausted  and  competition  in  demand  causes  the  ffrst 
rise  in  prices.  This  soon  induces  greater  production, 
and  finally  the  increasing  demand  makes  new  invest¬ 
ments  attractive.  Until  this  rise  in  prices  takes  place 
the  average  merchant  does  not  feel  any  decidedly 
beneficial  effects  from  the  changing  conditions. 

Europe  sells  back  to  us  our  best  stocks  and  bonds. 
— Tempted  later  by  higher  prices,  Europe  now  re¬ 
turns  to  us  some  of  our  choicest  bonds  and  stocks, 
and  so  delays  the  inflow  of  gold  into  this  country 
for  some  time  after  one  would  naturally  expect  it  to 
flow  toward  our  shores. 

It  has  taken  up  to  the  present  time  for  us  to  pay 
up  our  European  obligations  and  to  have  an  accumu¬ 
lating  surplus  there  to  our  credit.  The  process  has 
been  long  and  tedious  and  has  needed  some  good 
crops  to  help  out;  but  until  this  has  taken  place,  no 
real  prosperity  can  be  expected,  as  our  surplus  capi¬ 
tal,  instead  of  being  used  at  home,  is  being  diverted 
abroad. 

Increase  in  purchasing. — The  period  of  limiting 
one’s  purchases  to  less  than  one’s  needs,  let  alone  his 
desires,  is  passing  away,  and  long  felt  wants  now 
begin  to  find  expression  in  increased  purchases. 
The  years  of  enforced  economy  and  hesitation  are 
passing. 

A  land  movement  now. — Towards  the  end  of  the 
depresssed  period,  about  the  third  or  fourth  year 
after  the  panic,  and  especially  if  the  previous  year 


186 


HOW  TO  FORECAST 


has  seen  a  good  crop  and  good  prices,  a  land  buying 
movement  of  large  proportions  will  set  in,  due  to 
the  fact  that  the  farmer  has  suffered  less  than  any 
other  class,  to  the  increase  in  population,  and  to  the 
fact  that  dull  business  in  the  cities  has  driven  many 
back  to  the  land.  Land  has  paid  the  best  of  all  in¬ 
vestments  and  farmers  have  suffered  the  least.  The 
saving  habits  of  the  farmer,  now  long  enforced,  with 
a  fairly  good  price  for  his  crops,  have  made  him  well 
to  do  and  have  given  him  a  balance  in  the  bank. 
This  he  naturally  puts  back  into  the  land,  for  the 
benefit,  often,  of  his  children,  who  have  increased  in 
number,  and  some  of  whom  have  reached  an  age 
where  they  need  more  land  to  cultivate.  Also,  a 
number  of  the  younger  generation  have  themselves 
saved  up  enough  to  make  first  payments  on  account 
of  land  purchases. 

Recovery  slow. — The  recovery  of  the  business 
world  from  its  long  period  of  depression  is  like  that 
of  a  sick  man  from  the  effects  of  a  severe  illness.  It 
is  slow  and  tedious  and  there  are  times  when  reac¬ 
tions  set  in  that  for  a  while  dash  the  sanguine  hopes 
of  the  patient  and  his  friends.  But  while  slow  it  is 
sure,  and  the  rising  sun  of  prosperity  finally  floods 
the  land  with  its  brightness. 

People  live  on  higher  plane.— In  each  new  period 
of  prosperity  the  people  reach  a  higher  plane  of  con¬ 
sumption  and  enjoyment  than  ever  before. 

We  have  gone  through  the  changes  of  the  twenty 
year  cycle,  with  its  good  and  bad  times,  and  have 
now  caught  up  to  the  period  mentioned  in  the  first 
chapter  of  this  book. 

Panic  features  lessening. — It  is  difficult  at  present 
to  forecast  how  severe  the  next  panic  will  be,  owing 
to  the  1907  panic  having  occurred — an  experience  we 


BUSINESS  CONDITIONS 


187 


did  not  have  prior  to  other  commercial  panics;  but 
there  is  no  doubt  that  in  time  the  panic  feature  will 
be  practically  eliminated,  and  the  depression  that 
follows  greatly  mitigated.  In  fact,  this  has  already 
occurred  in  the  case  of  the  financial  panic,  for  1903 
was  nothing  like  as  severe  as  1884. 

Superior  business  and  banking  methods;  the  rapid 
development  of  our  country’s  resources,  passing 
from  a  speculative  to  an  investment  basis;  the  great 
accumulations  of  capital  and  the  growth  of  a  large 
investment  class;  better  transportation  facilities  and 
growing  solidity  of  our  railroads,  which  are  now 
past  the  experimental  and  competitive  stage;  the 
lessening  of  adverse  and  purely  theoretical  legisla¬ 
tion  which  is  bound  to  come;  the  abandonment  of 
schemes  of  inflation  or  unwise  tampering  with  the 
currency,  and  the  passage  of  necessary  laws  regu¬ 
lating  our  banking  and  circulation  systems;  and  our 
better  handling  of  the  situation  when  the  crisis  is 
on,  as  a  result  of  past  experience — all  these  factors 
will  work  together  to  modify  the  effects  of  future 
panics  and  depressions. 


Different  From  All  Others 

THE  MAGAZINE  OF  WALL  STREET 

What  Makes  The  Market :  By  G.  C.  Sel- 
den.  How  to  find  and  interpret  the  factors 
that  make  prices. 

Studies  in  Stock  Speculation :  By  “  Rollo 
Tape.”  How  to  analyze  market  conditions 
and  interpret  fluctuations. 

The  Bargain  Indicator :  showing  each  month 
which  stocks  are  cheap  on  their  earnings. 

The  Market  Outlook :  forecasting  proba¬ 
bilities  in  financial  markets  for  the  coming 
month. 

The  Investment  Digest :  containing  sum¬ 
maries  of  the  latest  news  on  all  important 
securities. 

Essential  Statistics:  giving  at  a  glance  the 
important  figures  in  regard  to  the  business 
and  investment  situation. 

Numerous  special  articles  monthly  by  practical 
stock  market  and  investment  experts. 

On  All  Newsstands  or  25c.  by  Mail. 

THE  TICKER  MAGAZINE 

2  RECTOR  STREET, 


NEW  YORK 


/ 


\ 


